UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
June 30, 2011
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from
to
Commission file number:
000-31203
NET 1 UEPS TECHNOLOGIES,
INC.
(Exact name of registrant as specified in its
charter)
Florida
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98-0171860
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(State or other jurisdiction
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(I.R.S. Employer
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of incorporation or organization)
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Identification No.)
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President Place, 4
th
Floor, Cnr. Jan
Smuts Avenue and Bolton Road
Rosebank, Johannesburg 2196, South
Africa
(Address of principal executive offices)
Registrants telephone number, including area code:
27-11-343-2000
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock,
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par value $0.001 per share
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NASDAQ Global Select Market
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Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
[ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
[ ] No [X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filings requirements for the past 90 days.
Yes
[X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
[X]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act (Check one):
[ ] Large accelerated filer
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[X] Accelerated filer
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[ ] Non-accelerated filer
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[ ] Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes [
] No [X]
The aggregate market value of the registrant's common stock held
by non-affiliates of the registrant as of December 31, 2010 (the last business
day of the registrants most recently completed second fiscal quarter), based
upon the closing price of the common stock as reported by The Nasdaq Global
Select Market on such date, was $408,272,810. This calculation does not reflect
a determination that persons are affiliates for any other purposes.
As of August 23, 2011, 45,152,805 shares of the registrants
common stock, par value $0.001 per share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement for our 2011
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Form 10-K.
NET 1 UEPS TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
Year Ended June 30, 2011
1
PART I
FORWARD LOOKING STATEMENTS
In
addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements that involve risks and uncertainties that could cause
our actual results to differ materially from those projected, anticipated or
implied in the forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in Item 1ARisk Factors. In some cases, you can identify forward-looking
statements by terminology such as may, will, should, could, would,
expects, plans, intends, anticipates, believes, estimates,
predicts, potential or continue or the negative of such terms and other
comparable terminology. You should not place undue reliance on these
forward-looking statements, which reflect our opinions only as of the date of
this Annual Report. We undertake no obligation to release publicly any revisions
to the forward-looking statements after the date of this Annual Report. You
should carefully review the risk factors described in other documents we file
from time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-Q to be filed by us in our 2012 fiscal year, which
runs from July 1, 2011 to June 30, 2012.
ITEM
1.
BUSINESS
Overview
We
provide payment solutions and transaction processing services across a wide
range of industries and in various geographies.
We
have developed and market a smart-card based alternative payment system for the
unbanked and underbanked populations of developing economies. Our market-leading
system enables the estimated four billion people who generally have limited or
no access to a bank account to enter affordably into electronic transactions
with each other, government agencies, employers, merchants and other financial
service providers. Our universal electronic payment system, or UEPS, uses
biometrically secure smart cards that operate in real-time but offline, unlike
traditional payment systems offered by major banking institutions that require
immediate access through a communications network to a centralized computer.
This offline capability means that users of our system can conduct transactions
at any time with other card holders in even the most remote areas so long as a
smart card reader, which is often portable and battery powered, is available.
Our off-line systems also offer the highest level of availability and
affordability by removing any elements that are costly and are prone to outages.
In addition to effecting purchases, cash-backs and any form of payment, our
system can be used for banking, health care management, international money
transfers, voting and identification.
We
also develop and provide secure transaction technology solutions and services,
and offer transaction processing, financial and clinical risk management
solutions to various industries. Our core competencies around secure online
transaction processing, cryptography, mobile telephony and integrated circuit
card (chip/smart card) technologies are principally applied to electronic
commerce transactions in the telecommunications, banking, payroll, retail,
health care, petroleum and utility industries.
Our
technology is widely used in South Africa today, where we distribute pension and
welfare payments, using our UEPS technology, to over 3.2 million recipients in
five of South Africas nine provinces, process debit and credit card payment
transactions on behalf of retailers that we believe represent nearly 65% of
retailers within the formal retail sector in South Africa through our EasyPay
system, process value-added services such as bill payments and prepaid
electricity for the major bill issuers and local councils in South Africa and
provide mobile telephone top-up transactions for all of the South African mobile
carriers. We are the largest provider of third-party payroll payments in South
Africa through our FIHRST service that processes monthly payments for
approximately 1,250 employers representing over 850,000 employees. Our
MediKredit service provides the majority of funders and providers of healthcare
in South Africa with an on-line real-time management system for healthcare
transactions. We perform a similar service in the US through our XeoHealth
subsidiary.
During
the second quarter of fiscal 2011, we acquired KSNET, the second largest
transaction processor by volume in Korea, which offers card processing, payment
gateway and banking value-added services in that country. The acquisition of
KSNET expands our international footprint as well as diversifies our revenue,
earnings and product portfolio.
All
references to Net1, the Company, we, us, or our are references to Net
1 UEPS Technologies, Inc. and its consolidated subsidiaries, collectively,
except as otherwise indicated or where the context indicates otherwise.
2
Market Opportunity
Services
for the Under-banked:
According to the United States Census Bureau, the
worlds population is currently approximately seven billion people. Yet of this
total, it has been reported that over four billion people earn less than the
purchasing parity equivalent of two dollars per day. In general, these people
either have no bank account or very limited access to formal financial services.
This situation arises when either banking fees are too high relative to an
individuals income, a bank account provides little or no meaningful benefit or
there is insufficient infrastructure to provide financial services economically
in the individuals geographic location. We refer to these people as the
unbanked and the under-banked. These individuals typically receive wages,
welfare benefits, money transfers or loans in the form of cash, and conduct
commercial transactions, including the purchase of food and clothing, in cash.
The use
of cash, however, presents significant risks. In the case of recipients, they
generally have no secure way of protecting their cash other than by converting
it immediately into goods, carrying it with them or hiding it. In cases where an
individual has access to a bank account, the typical deposit, withdrawal and
account fees meaningfully reduce the money available to meet basic needs. For
government agencies and employers, using cash to pay welfare benefits or wages
results in significant expense due to the logistics of obtaining that cash,
moving it to distribution points and protecting it from theft.
With
over 25 million cardholders in more than ten developing countries around the
world, our track record and scale uniquely positions us to continue further
geographical penetration of our technology in additional emerging countries.
Online
transaction processing services:
The rapid global growth of retail credit
and debit card transactions is reflected in the March 2011 Nilson Report,
according to which worldwide annual general purpose card purchase volume
increased 16.4% to $12.7 trillion in 2010. General purpose cards include the
major card network brands such as MasterCard, Visa, China UnionPay and American
Express. We operate the largest bank-independent transaction processing service
in South Africa through EasyPay, where we have developed a suite of value-added
services such as bill payment, airtime top-up, gift card, money transfer and
prepaid utility purchases that we offer as a complete solution to merchants and
retailers. Following our acquisition of KSNET, we operate the second largest
transaction processor by volume in Korea, where we provide card processing,
banking value-added services and payment gateway functionality to the retail
industry. Our expertise in on-line transaction processing and value-added
services provides us with the opportunity to participate globally in this
rapidly growing market segment.
Mobile
Payments:
In February 2010, the United Nations International
Telecommunications Union estimated that there were now approximately 4.6 billion
mobile phone subscribers deployed globally, and we believe that this number
includes subscribers in the majority of our targeted emerging economies. Despite
lacking access to formal financial services, large proportions of the
under-banked customer segment own and utilize mobile phones. As a result, mobile
phones are increasingly being viewed as a channel through which this underserved
population can gain access to formal financial and other services. Today, most
mobile payment solutions offered by various participants in the industry largely
provide access to information and basic services, such as allowing consumers to
check account balances or transfer funds between existing accounts with the
financial institution, but they offer limited functionality and ability to use
the mobile device as an actual payments and banking instrument. Our UEPS
solution is enabled to run on the SIM cards in mobile phones and provides our
users with secure payment and banking functionality.
Our
proprietary Net1 Mobile Virtual Card, or MVC, technology, when used on a mobile
device, is ideally suited to significantly reducing fraud in card not present
transactions typically performed in developed economies such as the United
States and Western Europe and is also a comprehensive banking and payment
solution for the under-banked population in developing economies.
Healthcare:
Given the lack of broad-based healthcare services in many emerging countries,
governments are increasingly focused on driving initiatives to provide
affordable and accessible healthcare services to their populations. Similarly,
countries such as the United States are embarking on expansive overhauls of
their existing healthcare systems.
Through
our MediKredit service we combine our payments expertise with our real-time
rules engine and claims processing technology to offer governments, funders and
providers of healthcare a comprehensive solution that offers a completely
automated healthcare rules adjudication and payment system, reducing both cost
and time.
3
Our Key Products
The UEPS Technology
We
developed our core UEPS technology to enable the affordable delivery of
financial products and services to the worlds unbanked and under-banked
populations. Our proprietary technology is designed to provide the secure
delivery of these products and services in the most under-developed or rural
environments, even in those that have little or no communications
infrastructure. Unlike a traditional credit or debit card where the operation of
the account occurs on a centralized computer, each of our smart cards
effectively operates as an individual bank account for all types of
transactions. All transactions that take place through our system occur between
two smart cards at the POS as all of the relevant information necessary to
perform and record transactions reside on the smart cards.
The
transfer of money or other information can take place without any communication
with a centralized computer since all validation, creation of audit records,
encryption, decryption and authorization take place on, or are generated
between, the smart cards themselves. Importantly, the cards are protected
through the use of biometric fingerprint identification, which is designed to
ensure the security of funds and card holder information. Transactions are
generally settled by merchants and other commercial participants in the system
by sending transaction data to a mainframe computer on a batch basis.
Settlements can be performed online or offline. The mainframe computer provides
a central database of transactions, creating a complete audit trail that enables
us to replace lost smart cards while preserving the notional account balance,
and to identify fraud.
Our UEPS technology includes functionality that allows the
following:
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Transparent and automatic recovery of transactions;
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Transaction cancellation;
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Refunds;
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Multiple audit trails;
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Offline loading;
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Biometric identification;
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Continuous debit;
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Multiple wallets;
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Morphing of other common payment systems, such as the EuroPay,
Mastercard and Visa global standard, or EMV;
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Automatic credit;
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Automatic debit;
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Interest calculations; and
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Milking / batching of large transaction volumes in an off-line
environment.
Our
UEPS technology incorporates the software, smart cards, payment terminals,
back-end infrastructure and transaction security to provide a complete payment
and transaction processing solution.
Within
industry, our UEPS technology is applied to electronic commerce transactions in
the fields of social security, wage distribution, banking, medical and patient
management, international money transfers, voting and identification systems.
Market sectors include government and NGOs, healthcare, telecoms, financial
institutions, retailers, petroleum and utilities.
Payment Transaction Management
Our
payment transaction management service incorporates the entire electronic funds
transfer, or EFT, and non-EFT transactions suites, allowing merchants to accept
a range of payment tokens/instruments and banks to acquire those payment
tokens/instruments. This encompasses conventional magnetic-stripe cards, credit,
debit and private label cards, and contact and contact-less smart cards with PIN
and/or biometric cardholder verification.
The
service utilizes a complex set of processing rules defined by the card
associations, central banks and local issuers governing the acceptance or
rejection of the payment token/instrument presented to a merchant. These rules
are applied for goods or services and vary by merchant category as background
tasks of the transaction management service.
We
provide a complete end-to-end reconciliation and settlement service to our
business partners, including dynamic reconciliation, report and screen-query
tools for down-to-store-level management and control purposes, backed by
24x7x365 monitoring and support, reconciliation, settlement, reporting, full
disaster recovery and redundancy services.
Our
flexible transaction management solutions enable simple integration to various
hardware platforms and pay-point applications within large retail groups,
smaller stores and franchises. These platforms include: retail POS, EFT
terminals, standalone PCs, self service terminals and kiosks, ATMs, mobile
phones and the internet.
4
We
also provide a range of value-added services as part of our transaction
management offering, such as bill payments, gift cards, prepaid airtime, prepaid
utilities and money transfers.
Healthcare Transaction Management
We
offer financial and clinical risk management solutions to both funders and
providers of healthcare, through online real-time management of healthcare
transactions. Our adaptable healthcare claims processing and managed care
services are designed to accommodate the complex benefit design as well as other
processing requirements of our clients and our functionality extends to all
healthcare claim types, including pharmacy, doctor, public and private hospital
claims. Our service is enabled by our proprietary claims processing and managed
care systems that adjudicate medical claims allowing patients and healthcare
providers to have immediate and accurate information on the financial and
clinical impacts of, and payment responsibilities for services and products
provided by healthcare providers.
Our
proprietary software allows for real-time claim adjudication involving the
submission of an electronic data interchange claim and receipt of a response
with the adjudication details within seconds. Our system allows for real-time
messaging with an immediate response to an enquiry within a single, synchronous
communication session. Our intellectual property incorporates rule stacking
technology that allows for the creation of a rule for a specific patient for a
specific healthcare product or service, which rule is then used to adjudicated
against in real-time. This unique technology offers complex rule applications in
a scalable and flexible manner on all medical claim types it is a heuristic
computerized framework that dynamically creates scenario-specific rules.
Payroll Transaction Management
Our
payroll transaction management service offers employers an easy and flexible
method of making payments to creditors arising from payroll processing. Our
solution enhances the electronic movement of money in the business and financial
community, assisting our clients to manage net pay, third party, garnishee order
and creditor payments correctly, promptly and securely. In addition, we provide
the relevant information to the recipient organization via predefined schedules
or payment remittance advices, thus simplifying the process of reconciliation.
MVC
We
have developed an innovative mobile phone-based payment solution, MVC, that
enables secure purchases with no disruption to existing merchant infrastructures
and significant incentives for all stakeholders.
The
MVC solution utilizes existing and traditional payment methods but enhances them
by replacing plastic card data with a one-time-use virtual card data, hence
eliminating the risk of theft, phishing, skimming, spoofing, etc. The virtual
card data replaces digit-for-digit the credit (or debit) card number, the
expiration date and the card verification value with only the issuer bank
identification number (first 6-digit) remaining constant.
The
MVC solution uses the mobile phone to generate virtual cards. The mobile phone
is the most available, cost-effective, secure and portable platform for
generating virtual cards for remote payments (online, phone and catalogue
orders). Following a simple registration process, the virtual card application
is activated over-the-air, enabling the phone to generate virtual card numbers
completely off-line. MVCs are used like traditional plastic credit or debit
cards, except that as soon as the transaction is authorized, the generated card
number expires immediately.
Consumers
can easily generate a new card on their mobile phone to shop on the internet or
to place a catalogue or telephone order. MVCs are completely secure and can also
be sent in a single click to family, friends, and service providers. Once the
authorization request reaches the issuing bank processor, our servers decrypt
the virtual card data, authenticate the consumer and pass the transaction
request to the card issuer for authorization. MVC can be offered as a prepaid
solution or directly linked to a subscribers credit or debit card or other
funding account. Subscribers can load prepaid virtual accounts with cash at
participating locations, or electronically via their bank accounts or via direct
deposit.
The
benefits of MVC include, for:
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Card issuers
- increased transactional revenues from existing
accounts, driving more transactional revenues and elimination of fraudulent
card use.
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Mobile network operators
- revenues from payments, reduced churn,
opportunities for powerful co-branding schemes.
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Consumers
- peace of mind, ease of use, rewards.
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Merchants
- elimination of charge-backs and fraud at no extra
cost
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5
Financial services
We
have developed a suite of financial services that is offered to customers
utilizing our payment solutions. We are able to provide our customers with
competitive microfinance, insurance and money transfer products based on our
understanding of their risk profiles and lifestyle requirements.
Hardware solutions
We
provide hardware solutions that have been developed to optimize the performance
of our payment and transaction processing solutions. These hardware solutions
include;
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Cryptographic solutions
- Our internally-developed
range of PIN encryption devices, card acceptance modules and hardware
security modules are primarily aimed at the financial, retail,
telecommunication, utilities and petroleum sectors. These devices and
modules are suited for high-speed transaction processing requirements,
acceptance of multiple payment tokens, value-added services at point of
transaction, and adherence to stringent transaction security and payment
association standards such as TDES and EMV.
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Chip and GSM licensing
- We supply chip cards into
the South African and other international markets. We work with mobile
network operators, card manufacturers and semiconductor manufacturers to
provide card technology, solutions and software that enable mobile
telephony, mobile transactions and value-added services to take place in a
trusted, secure and convenient manner. These chip products and technology
include operating system and application development, card manufacture and
production, from concept and design through, printing, packaging and
distribution. At the core of our chip business is the strategy of
licensing chip software to a wide spectrum of other industry
participants.
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POS solutions
We supply our secure, integrated
POS payment products and systems, including:
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FlexiLANE An in-store controller ideally suited to
multi-lane retail and petroleum station environments. The in- store
controller forms an interfacing and concentration layer between a group of
distributed terminal devices and a centralized payment and value-added
service, or VAS, aggregator. This helps large retailers and petroleum
companies to overcome the challenges associated with processing multiple
transactions from multiple access devices using multiple tender
types;
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FlexiGATE A terminal and payment gateway that manages
the routing of all FlexiLANE traffic and enables retailers to supply VAS
such as airtime top-up, electricity payment and bill payment;
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FlexiPOS An innovative retail solution that allows the
retailer's various payment and VAS solution requirements to be streamlined
into a single payment terminal. FlexiPOS transforms the POS terminal into
a convenient and consumer friendly place of purchase, place of payment and
place of service; and
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EMV Net1s payment expertise helps ensure that
retailers together with their acquirers meet the requirements of upgrading
software, terminals and security for conformity with the latest
international chip card standards.
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Ingenico POS equipment
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Virtual top-up
- our VTU solution facilitates
mobile phone-based prepaid airtime vending. The VTU technology enables
prepaid cell phone users to purchase additional airtime simply, securely
and conveniently. The vendor uses its GSM handset to purchase bulk airtime
from a mobile network operator. Airtime value, as opposed to a virtual
voucher, is then transferred directly from the vendors cellular handset
to that of the customer. When the vendor runs out of airtime value, it is
a simple task to purchase more to resell to
customers.
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Our Strategy
We
intend to provide the leading transacting system for the worlds estimated four
billion unbanked and under-banked people to engage in electronic transactions,
as well as to provide our transaction processing, value-added services
processing, new secure mobile payment technologies and health care processing
services globally. To achieve these goals, we are pursuing the following
strategies:
Build
on our significant and established South African infrastructure
In South
Africa, we are one of the leading independent transaction processors, as the
leading provider of social welfare payment distribution services to the
countrys large unbanked and under-banked population, the largest third-party
processor of retail merchant transactions and the leading processor of
third-party payroll payments. We believe that our large cardholder base,
proprietary technology and payment infrastructure, together with our strong
government and business relationships, position us at the epicenter of commerce
in the country.
6
We
believe that we are well-positioned to continue to gain market share and build
upon the critical mass that we have developed in South Africa and have
identified the following opportunities to continue to drive growth in our South
African business:
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Government focus on expansion of social
benefits
As a result of the South African governments focus on the
provision of social grants as a core element of its social assistance and
poverty alleviation policies, we believe that we remain well- positioned
to continue to provide our payment services to the government and
beneficiaries. We believe that there is a compelling argument for the
South African Social Security Agency, or SASSA, and other government
agencies to utilize our innovative, off-line, secure, efficient and
low-cost payment solution to reach beneficiaries across the country, even
in the most remote and deep rural areas where the communication and
electricity infrastructure is sparse or non-existent.
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Increasing adoption of existing services
Our
technology supports a variety of other products and smart card to smart
card, or S2S, services that expand the use of our technology and provide
us with new sources of transaction-based revenues. During the last several
years, we have introduced these new products and services in South Africa
for existing and newly-enrolled cardholders. We have installed our POS
terminals in thousands of mostly rural merchant locations throughout the
country which allows beneficiaries to receive their grants at these
locations and transact business with the retailers using our smart card.
During fiscal 2011, we processed 19.1 million transactions with a total
value of ZAR 11.6 billion at these merchant locations.
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Introduction of new services
We are also
poised to benefit from the introduction and adoption of new services
across our various platforms, which we believe will generate significant
incremental transaction fee revenue from current and new users at a
relatively low cost to us. Some of these services include:
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Acceptance of UEPS cards in traditional POS
terminals
We are currently enabling our cards to be compliant with
international EMV standards, which will allow our cardholder base to
purchase goods and services at merchant POS locations that currently
accept MasterCard-branded cards. This additional functionality will allow
us to expand significantly the number of terminals that use our smart
card, capturing fees from new transactions and positioning our cards to be
used by a larger share of the banked population.
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Value-added services through multiple EasyPay
platforms
EasyPay is the largest bank-independent financial
switch and merchant processor in South Africa for credit and debit card
transactions. EasyPay processed 708 million transactions with a total
value of ZAR 164.9 billion during fiscal 2011. Our technology also allows
us to provide a variety of additional, value-added payment services, such
as bill payment, prepaid mobile top-up, prepaid utility services and gift
cards, that we can sell into our existing card holder base as well as to
new customers. We have developed additional platforms to access EasyPays
offerings such as a self service kiosks, or EasyPay Kiosk, and web and
mobile phone applications to create a larger, seamless, value-added
payments eco- system.
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Third-party payments from payroll processing
through FIHRST
Through our FIHRST service, we offer employers an
easy and flexible method of making payments to employees and
payroll-related creditors. By combining the FIHRST service and the EasyPay
product suite, we can provide employees with the ability to pay their
bills or purchase prepaid airtime and utilities as a payroll deduction or
by providing them with credit facilities.
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Using
our first wave/second wave approach to expand into new markets
We use what
we refer to as a first wave/second wave approach to market expansion. In the
first wave, we seek to identify an application for which there is a
demonstrated and immediate need in a particular territory and then sell and
implement our technology to fulfill this initial need. As a result, we achieve
the deployment of the required technological infrastructure as well as the
registration of a critical mass of cardholders. During this phase, we generate
revenues from the sale of our software and hardware devices, as well as ongoing
revenues from transaction fees, maintenance services and the use of our
biometric verification engine. Once the infrastructure has been deployed and we
achieve a critical mass of customers, we focus on the second wave, which
allows us to use this infrastructure to provide users, at a low incremental cost
to us, with a wide array of financial products and services for which we can
charge fees based on the value of the transactions performed.
Leveraging
our new payment technologies to gain access to developed economies
While our
business has traditionally focused on marketing products and services to the
worlds unbanked and under-banked population, we have developed and acquired
proprietary technology, such as our MVC application for mobile telephones that
is designed to eliminate fraud associated with card not present credit card
transactions, which are those effected by telephone or over the internet. We
have recently introduced this technology, as well as our healthcare management
system in the United States, and we plan to expand our offering into Western
Europe and other developed economies.
7
Pursue
strategic acquisition opportunities to gain access to new markets or
complimentary product
We will continue to pursue acquisition opportunities
that provide us with an entry point for our existing products into a new market,
or provides us with technologies or solutions complementary to our current
offerings.
Our
Clusters and Business Units
Our
company is organized into the following clusters and within each cluster,
separate business units.
Transactional
Solutions Cluster
Cash
Paymaster Services (CPS)
Our
CPS business unit deploys our UEPS Social Grant Distribution technology to
distribute social welfare grants on a monthly basis to roughly 3.2 million
beneficiaries in five of South Africas nine provinces. These social welfare
grants are distributed on behalf of SASSA. During our 2011, 2010 and 2009 fiscal
years, we derived 47%, 66% and 65% of our revenues respectively, from CPS
social welfare grant distribution business.
CPS
provides a secure and affordable transacting channel between social welfare
grant beneficiaries, SASSA and formal businesses. CPS enrolls social welfare
grant beneficiaries by issuing them a UEPS smart card that digitally stores
their biometric fingerprint templates on the smart card, enabling them to access
their social welfare grants securely at any time or place. The smart card is
issued to the beneficiary on site and utilizes optical fingerprint sensor
technology to identify and verify a beneficiary. The beneficiary simply inserts
a smart card into the POS device and is prompted to present his fingerprint. If
the fingerprint matches the one stored on the smart card, the smart card is
loaded with the value created for that particular smart card.
The
smart card provides the holder with access to all of the UEPS functionality,
which includes the ability to have the smart card funded with pension or welfare
payments, make retail purchases, enjoy the convenience of pre-paid facilities
and qualify for a range of affordable financial services, including insurance
and short-term loans. The smart card also offers the card holder the ability to
make debit order payments to a variety of third parties, including utility
companies, schools and retail merchants, with which the holder maintains an
account. The card holder can also use the smart card as a savings account.
Our
UEPS - Social Grant Distribution technology provides numerous benefits to
government agencies and beneficiaries. The system offers government a reliable
service at a reasonable price. For beneficiaries, our smart card offers
convenience, security, affordability and flexibility. They can avoid long
waiting lines at payment locations and do not have to get to payment locations
on scheduled payment dates to receive cash. They do not lose money if they lose
their smart cards, since a lost smart card is replaceable and the biometric
fingerprint identification technology helps prevent fraud. Their personal
security risks are reduced since they do not have to safeguard their cash.
Beneficiaries have access to affordable financial services, can save and earn
interest on their smart cards and can perform money transfers to friends and
relatives living in other provinces. Finally, beneficiaries pay no transaction
charges to load their smart cards, perform balance inquiries, make purchases or
downloads or effect monthly debit orders. For us, the system allows us to reduce
our operating costs by reducing the amount of cash we have to transport.
This
business unit has been allocated to our South African transaction-based
activities and smart card accounts reporting segments.
KSNET
Our
KSNET business unit is a significant payment solutions provider in Korea, has
the broadest product offering in the country, a base of approximately 200,000
merchants and an extensive direct and indirect sales network. KSNET is based in
Seoul, Korea. KSNETs core operations comprise of three project offerings,
namely card value-added network, or VAN, payment gateway, or PG, and banking
VAN. KSNET is able to realize significant synergies across these core operations
because it is the only payment solutions provider that offers all three of these
offerings in Korea. Over 90% of KSNETs revenue comes from the provision of
payment processing services to merchants and card issuers through its card
VAN.
KSNETs
core product offerings are described in more detail below:
|
|
Card VAN
KSNETs card VAN offering manages credit
and other non-cash alternative payment mechanisms for retail transaction
processing for a wide range of merchants and every credit card issuer in
Korea. Non-cash alternative payment mechanisms for which KSNET provides
processing services include all credit and debit cards and e-currency
(K-cash and TMoney). KSNET also records cash transactions for the Korean
National Tax Service in the form of cash receipts.
|
8
|
|
PG
KSNET offers PG services to the rapidly growing
number of merchants that are moving online in Korea. PG provides these
merchants with a host of alternative payment solutions including the
ability to accept credit and debit cards, gift and other prepaid cards,
and bank account transfers. PG also provides virtual account capabilities.
KSNET is currently the only card VAN provider that also provides PG
services in Korea. PG offers us an attractive growth opportunity as
e-commerce transactions represent an increasing share of payments, driven
by increased wireline and wireless broadband penetration, an increasing
number of merchants moving online, and the enhanced security of online
transactions driving consumer acceptance. We believe that KSNET can become
the leading provider in the PG industry by leveraging its existing
merchant base and entering into new markets earlier than competitors.
|
|
|
Banking VAN
KSNETs banking VAN operations
currently include account transaction processing services, payment and
collections to banks, corporate firms, governmental bodies, and
educational institutions. We distinguish card VAN from banking VAN because
in the Korean VAN market, banking VAN is recognized as a distinct service
from card VAN. We are the only card VAN provider that also provides
banking VAN services. Because the banking VAN business industry is at a
nascent stage, the market at this time is relatively small.
|
This
business unit has been allocated to our international transaction-based
activities reporting segments.
EasyPay
Our
EasyPay business unit operates the largest bank-independent financial switch in
Southern Africa and is based in Cape Town, South Africa. EasyPay focuses on the
provision of high-volume, secure and convenient payment, prepayment and
value-added services to the South African market. EasyPays infrastructure
connects into all major South African banks and switches both debit and credit
card EFT transactions for some of South Africas leading retailers and petroleum
companies. It is a South African Reserve Bank, or SARB, approved third-party
payment processor.
In
addition to its core transaction processing and switching operations, EasyPay
provides a complete end-to-end reconciliation and settlement service to its
customers. This service includes dynamic reconciliation as well as easy-to-use
report and screen-query tools for down-to-store-level, management and control
purposes.
The
EasyPay suite of services includes:
|
|
EFT
EasyPay switches credit, debit and fleet card
transactions for leading South African retailers and petroleum companies;
|
|
|
EasyPay bill payment
EasyPay offers consumers a
point-of-sale bill payment service which is integrated into a large number
of national retailers, the internet, self service kiosks and mobile
handsets. EasyPay processes monthly account payment transactions for over
300 different bill issuers including major local authorities, telephone
companies, utilities, medical service providers, traffic departments, mail
order companies, banks and insurance companies;
|
|
|
EasyPay prepaid electricity
This service enables
local utility companies such as Eskom Holdings Limited and a growing
number of local authorities on a national basis to sell prepaid
electricity to their customers;
|
|
|
Prepaid airtime
EasyPay vends airtime at retail
POS terminals for all the South African mobile telephone network
operators;
|
|
|
Electronic gift voucher
EasyPay supports the
electronic generation, issuance and redemption of paper or card-based gift
vouchers;
|
|
|
EasyPay licenses
EasyPay enables the issuance of
new South African Broadcasting television licenses and the capturing of
existing license details within retail environments via a web-based user
interface;
|
|
|
Third party switching and processing
support
EasyPay switches transactions from retail POS systems to the
relevant back-end systems; and
|
|
|
Hosting services
EasyPays infrastructure supports
the hosting of payment servers and applications on behalf of third
parties, including financial institutions.
|
|
|
EasyPay Kiosk
We have developed a biometrically
enabled, self service kiosk that allows our EasyPay customers to access
all the value-added services provided by EasyPay and to create and load
their EasyPay virtual wallets with value.
|
|
|
EasyPay Web and Mobile
This service enables
EasyPay customers to access all the value-added services provided by
EasyPay, such as bill payments and the purchase of prepaid airtime and
utilities through a secure website that may be accessed through personal
computers or through mobile handsets.
|
EasyPay
provides 24x7 monitoring and support services, reconciliation, automated
clearing bureau settlement, reporting, full disaster recovery and redundancy
services.
This
business unit has been allocated to our South African transaction-based
activities reporting segment.
9
MediKredit/
XeoHealth
Our
MediKredit business unit operates and markets our Healthcare Transaction
Management systems and solutions in South Africa and is based in Johannesburg,
South Africa. We estimate that MediKredits products affect 4.2 million of the
seven million health-insured lives in South Africa. We also service the
claims-processing needs of 100 medical schemes plans and ten of the major
healthcare administrators in South Africa. Our functionality caters for all
healthcare claim types which include pharmacy, doctor, private and public
hospital claims.
Our
business development in the US of our real time adjudication, or RTA, solutions
for the end-to-end electronic processing of medical claims information is
marketed through XeoHealth. We are currently assessing a number of ventures in
the US whereby XeoHealth will act either as the primary contractor for the
provision of our RTS solution to customers, or as a subcontractor to parties
contracted to provide an adjudication solution.
This
business unit has been allocated to our South African transaction-based
activities reporting segment.
FIHRST
FIHRST
offers South African employers our payroll transaction management service and is
based in Johannesburg, South Africa. FIHRST currently processes payments
exceeding R68.5 billion on behalf of our clients every year, enabling salaries
departments to achieve greater levels of efficiency and employee service. We
have been chosen as the preferred payments partner by more than 1,250 companies
of all sizes across all sectors of the economy, representing 850,000 employees.
FIHRST is recognized by and works in partnership with the majority of third
party payroll organizations including pension fund and medical aid
administrators.
This
business unit has been allocated to our South African transaction-based
activities reporting segment.
Universal
Electronic Technological Solutions (UETS)
Our
UETS business unit is based in Johannesburg, South Africa and focuses on the
sale, implementation and support of our UEPS technology, ranging from large
scale, national projects to smaller, product specific regional projects. UETS
focuses on identifying, defining and activating an entry point to commence
operations in Africa (excluding South Africa), and in Iraq.
UETS
markets the following solutions and products:
-
The UEPS national switching, settlement, clearing and smart card solutions
offering interoperability with existing banking infrastructure;
-
Wave 2 opportunities, such as financial services in countries with an
established UEPS infrastructure;
-
Individual stand-alone UEPS applications, with processing outsourced to
Net1 regional offices, similar to the model deployed for the payment of
welfare grants in Iraq;
-
UEPS mobile banking solutions targeted at banks and/or mobile operators;
-
E-Government applications such as multi-purpose national identity cards
and national welfare & healthcare solutions; and
-
Secure verification of existing EMV Debit / credit card transactions using
Net1s biometric identification technology.
Our
UETS team also provides business development support in territories where UEPS
systems have been sold and implemented, such as Ghana, Malawi, Namibia, Botswana
and Nigeria.
This
business unit has been allocated to our international transaction-based
activities and hardware, software and related technology sales reporting
segments.
Net1
UTA
Our
Net1 UTA business unit provides smart card-based payment systems to banks,
enterprises and government authorities in Russia, Ukraine, Uzbekistan, India and
Oman. Net1 UTA is headquartered in Vienna, Austria, and has subsidiaries in
India and Russia. Following the decline in Net1 UTAs revenues during fiscal
2011 and 2010 as a result of the difficult market and trading conditions in its
traditional markets, we recently completed a significant restructuring of its
business activities. Net1 UTA now consists of a scaled-down department, based in
Moscow, that provides ongoing support to its existing customers and a business
development, implementation and support department, based in Vienna, that
focuses on commercializing our MVC technology globally, excluding the US.
This
business unit has been allocated to our hardware, software and related
technology sales reporting segment.
10
Net1
Virtual Card
Our
Net1 Virtual Card business unit is based in Dallas, Texas, and is responsible
for the commercialization of our MVC technology in the US. Our launch customer
in the US, MetroPCS, is one of the top five US wireless carriers. MetroPCS
offers our MVC technology under the VCPay brand as an application that is
pre-loaded on new smart phones. We believe our VCPay
TM
application is
the first mobile phone-based prepaid program with no requirement for the user to
have a physical card or bank account. In addition, we have entered into
agreements with MoneyGram, International, a global money transfer company, and
GreenDot Corporation, a major issuer of prepaid credit cards in the United
States, to enable subscribers to load their prepaid virtual accounts with cash
at any of MoneyGrams and GreenDots 100,000 US agents, which are located in
most communities including many grocery, pharmacy and convenience store chains,
or electronically via their bank accounts or via direct deposit.
This
business unit has been allocated to our international transaction-based
activities reporting segments.
Hardware
and Software Sales Cluster
We
have dedicated business units responsible for the development, production,
marketing, maintenance and support of our Hardware Solutions. These business
units are:
|
|
Cryptographic solutions
based in Johannesburg and
Durban, South Africa, this business unit manages our Incognito range of
PIN encryption devices, card acceptance modules and hardware security
modules. These solutions are used globally by numerous customers in the
financial, retail, telecommunication, utilities and petroleum sectors and
by all other Net1 business units that operate payment and transaction
processing services.
|
|
|
Chip and GSM licensing
this business unit is a
supplier of chip cards and GSM licenses into the South African and other
international markets. We operate our own small factory in Johannesburg,
South Africa and license numerous mobile network operators, card
manufacturers and semiconductor manufacturers to provide card technology,
solutions and software that enable mobile telephony, mobile transactions
and value-added services.
|
|
|
POS solutions
based in Johannesburg, South Africa,
our POS Solutions business unit is responsible for marketing in South
Africa our secure, integrated POS payment products and systems.
|
|
|
VTU
based in Johannesburg, South Africa, our VTU
business unit is responsible for the global marketing and support of our
VTU solution.
|
These
business units have been allocated to our hardware, software and related
technology sales reporting segment.
Financial
Services Cluster
Finance
Holdings
This
business unit is responsible for identifying financial services products that
can be provided to our UEPS cardholders in South Africa and then marketing and
implementing the provision of those products. We currently provide micro-loans
to our UEPS cardholders who receive social welfare grants through our system in
the KwaZulu-Natal and Northern Cape provinces. We provide the loans ourselves
and generate revenue from the service fees charged on these loans. We also sell
life insurance products on behalf of registered underwriters and earn revenue
through the commissions we receive on the sale of policies.
Our
wage payment system offers wage earners a UEPS card that allows them to receive
payment, transact and access other financial services in a secure,
cost-effective way.
This
business unit has been allocated to our financial services reporting segment.
Corporate
Cluster
The
Corporate Cluster provides global support services to our business units, joint
ventures and investments for the following activities:
-
Group executive
responsible for the overall company management,
defining our global strategy, investor relations and corporate finance
activities.
-
Finance and administration
provides company-wide support in the
areas of accounting, treasury, human resources, administration, legal,
secretarial, taxation, compliance and internal audit.
-
Group information technology
defines our overall IT strategy and
the overall systems architecture and is responsible for the identification and
management of the groups research and development activities.
-
Joint ventures and investments unit
provides governance support to
our joint ventures and assists with the evaluation of new investment
opportunities.
11
Competition
In
addition to competition that our UEPS system faces from the use of cash, checks,
credit and debit cards, existing payment systems and the providers of financial
services, there are a number of other products that use smart card technology in
connection with a funds transfer system. While it is impossible for us to
estimate the total number of competitors in the global payments marketplace, we
believe that the most competitive product in this marketplace is EMV, a system
that is promoted by most of the major card companies such as Visa, Mastercard,
JCB and American Express. The competitive advantage of our UEPS offering is that
our technology can operate real-time, but in an off-line environment, using
biometric identification instead of the standard PIN methodology employed by our
competitors. We estimate that we process less than 1% of all global payment
transactions in the international marketplace.
In
South Africa, and specifically in the payment of social welfare grants, our
competitors include AllPay Consolidated Investment Holdings (Pty) Ltd, which is
responsible for social welfare payments in the Free State, Gauteng and Western
Cape provinces and a small portion of the Eastern Cape province, and Empilweni
Payout Services which is responsible for payments in the Mpumalanga province.
The South African banks and the South African Post Office, or SAPO, also offer
beneficiaries the option to open low cost bank accounts that enable the
beneficiaries to receive their welfare grants through the formal banking payment
networks.
We
compete primarily on the basis of the innovative nature and security of our
technology. We are able to load social welfare grants on behalf of the South
African government directly onto a biometrically secured UEPS smart card in
rural areas where there is little or no infrastructure or in semi-urban areas
through our merchant acquiring system. Our UEPS-enabled smart cards are therefore
used as a means of identification, security and as a transacting instrument.
Grants loaded onto our UEPS-enabled smart cards can be used both online and
offline and beneficiaries pay no monthly account or transaction fees. The usefulness
of a traditional bank card to its holder is dependent on the availability of
a branch network, ATM infrastructure and merchants accepting the card. Access
to bank branches, ATMs and merchants accepting traditional bank cards are limited
or nonexistent in the rural areas of South Africa. We believe the security,
functionality and simplicity of our smart card provides us with a unique ability
to service these rural areas of South Africa.
Our technology eliminates
the risk associated with receiving social welfare grants in cash as well as
the costs associated with transaction fees charged by banks when beneficiaries
exceed the minimum number of free transactions per month.
We
believe that SASSA considers the technology utilized, pricing of the payment
service rendered and other factors such as black economic empowerment, or BEE,
rating as the most important factors when considering potential service
providers. We compete with other service providers on these aspects through
SASSAs tender processes, when applicable, or through contract extension
negotiations.
We
have identified 10 major card VAN companies in Korea, of which KSNET is one of
the four largest. The other three large VAN companies are NICE Information &
Telecommunication Inc., First Data Korea Limited and Korea Information &
Communications Company, Limited. Entities operating in the VAN industry in Korea
compete on pricing and customer service.
EasyPays
competitors include BankservAfrica, UCS, eCentric and Transaction Junction.
BankservAfrica is the largest transaction processor in South Africa which
processes all transactions on behalf of the South African banks and claims to
process in excess of 2.6 billion transactions valued at trillions of rands
annually. During fiscal 2011, EasyPay processed 708 million transactions with an
approximate value of ZAR164.9 billion.
In
addition to our traditional competitors, we expect that we will increasingly
compete with a number of emerging entities in the mobile payments industry.
While the industry is still in its infancy, a number of entities are
establishing their presence in this space. Specifically indentified entities
include traditional payment networks such as Visa, MasterCard and American
Express; commercial banks such as Barclays and Citigroup; established technology
companies such as Apple, Google and PayPal; mobile operators such as AT&T,
Verizon, Vodafone and Bharti Airtel; as well as companies specifically focused
on mobile payments such as M-Pesa, Monetise and Square.
Research and Development
During
fiscal 2011, 2010 and 2009, we incurred research and development expenditures of
$5.7 million, $7.6 million and $8.9 million, respectively. These expenditures
consist primarily of the salaries of our software engineers and developers. Our
research and development activities relate primarily to the continual revision
and improvement of our core UEPS software and its functionality and the design
and development of our MVC concept. For example, we continually advance our
security protocols and algorithms as well as develop new UEPS features that we
believe will enhance the attractiveness of our product and service offerings.
Our research and development efforts also focus on taking advantage of
improvements in the hardware platforms that are not proprietary to us but which
form part of our system.
12
Intellectual Property
Our
success depends in part on our ability to develop, maintain and protect our
intellectual property. We rely on a combination of patents, copyrights,
trademarks and trade secret laws, as well as non-disclosure agreements to
protect our intellectual property. We seek to protect new intellectual property
developed by us by filing new patents worldwide. We hold a number of trademarks
in various countries.
Financial Information about Geographical Areas and Operating
Segments
Note
19 to our consolidated financial statements included in this annual report
contains detailed financial information about our operating segments for fiscal
2011, 2010 and 2009. Revenues based on the geographic location from which the
sale originated and geographic location where long-lived assets are held for the
years ended June 30, are presented in the table below:
|
|
|
Revenue
|
|
|
Long-lived
assets
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South Africa
|
$
|
264,485
|
|
$
|
267,478
|
|
$
|
220,408
|
|
$
|
115,809
|
|
$
|
111,430
|
|
$
|
98,694
|
|
|
Korea
|
|
68,392
|
|
|
-
|
|
|
-
|
|
|
258,791
|
|
|
-
|
|
|
-
|
|
|
Europe
|
|
10,465
|
|
|
12,301
|
|
|
19,560
|
|
|
139
|
|
|
42,489
|
|
|
101,371
|
|
|
Rest of world
|
|
78
|
|
|
585
|
|
|
6,854
|
|
|
6,817
|
|
|
8,081
|
|
|
9,128
|
|
|
Total
|
$
|
343,420
|
|
$
|
280,364
|
|
$
|
246,822
|
|
$
|
381,556
|
|
$
|
162,000
|
|
$
|
209,193
|
|
Employees
As
of June 30, 2011, we had 2,290 employees. On a segmental basis, 216 employees
were part of our management, 1,558 were employed in South African
transaction-based activities, 173 were employed in international
transaction-based activities, 2 were employed in financial services and 341 were
employed in smart card, hardware, software and related technology sales and
corporate activities.
On
a functional basis, four of our employees were part of executive management, 171
were employed in sales and marketing, 188 were employed in finance and
administration, 312 were employed in information technology and 1,615 were
employed in operations.
As
of June 30, 2011, approximately 120 of the 270 employees we have in the Limpopo
Province in South Africa who were performing transaction-based activities were
members of the South African Commercial Catering and Allied Workers Union and
approximately 154 of the 175 employees we have in Korea who perform
international transaction-based activities were members of the KSNET Union. We
believe we have a good relationship with our employees and these unions.
Corporate history
Net1
was incorporated in Florida in May 1997. Until June 2004, Net1 was a development
stage company and its business consisted only of holding a license to payment
systems intellectual property and an exclusive marketing agreement for the UEPS
technology outside South Africa, Namibia, Botswana and Swaziland. In June 2004,
Net1 acquired Net1 Applied Technologies Holdings Limited, or Aplitec, a public
company listed on the JSE Limited, or JSE. Aplitec owned the payment systems
intellectual property in South Africa, Namibia, Botswana and Swaziland and one
of its subsidiaries was the other party to the marketing agreement described
above. The primary purpose of the Aplitec transaction was to consolidate all
intellectual property into one company, to establish a first-mover advantage in
developing economies for the commercialization of the UEPS technology, and to
exploit market opportunities for growth through strategic alliances and
acquisitions. The transaction permitted Aplitecs shareholders to reinvest the
sale proceeds in Net1, but under South African exchange control regulations,
those shareholders were not permitted to hold Net1s securities directly. In
2005, Net1 completed an initial public offering and listed on the Nasdaq Stock
Market. In October 2008, Net1 listed on the JSE, in a secondary listing, which
enabled the former Aplitec shareholders (as well as South African residents
generally) to hold Net1 common stock directly.
Available information
We
maintain an Internet website at www.net1.com. Our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports are available free of charge through the SEC filings portion of
our website, as soon as reasonably practicable after they are filed with the
Securities and Exchange Commission. The information posted on our website is not
incorporated into this Annual Report on Form 10-K.
13
Executive Officers and Significant Employees of the
Registrant
Executive
officers
The
table below presents our executive officers, their ages and their titles:
Name
|
Age
|
Title
|
Dr. Serge C.P. Belamant
|
57
|
Chief executive
officer, chairman and director
|
Mr. Herman G. Kotze
|
41
|
Chief financial officer,
treasurer, secretary and director
|
Mr. Phil-Hyun Oh
|
52
|
Chief executive
officer and president, KSNET, Inc.
|
Mr. Nitin Soma
|
43
|
Senior vice president information
technology
|
Dr.
Belamant
is one of the founders of our company and has been our chief
executive officer since October 2000 and the chairman of our board since
February 2003. He was also chief executive officer of Aplitec. Dr. Belamant also
serves on the boards of a number of other companies that perform welfare
distribution services and the provision of microfinance to customers. Dr.
Belamant spent ten years working as a computer scientist for Control Data
Corporation where he won a number of international awards. Later, he was
responsible for the design, development, implementation and operation of the
Saswitch ATM network in South Africa that rates today as the third largest ATM
switching system in the world. Dr. Belamant has patented a number of inventions,
including our original funds transfer system patent, ranging from biometrics to
gaming-related inventions. Dr. Belamant has more than 30 years of experience in
the fields of operations research, security, biometrics, artificial intelligence
and online and offline transaction processing systems. Dr. Belamant holds a PhD
in Information Technology and Management.
Mr.
Kotze
has been our chief financial officer, secretary and treasurer since
June 2004. From January 2000 until June 2004, he served on the board of Aplitec
as group financial director. Mr. Kotzé joined Aplitec in November 1998 as a
strategic financial analyst. Mr. Kotzé is a member of the South African
Institute of Chartered Accountants.
Mr.
Soma
has served as our Senior Vice President of Information Technology since
June 2004. Mr. Soma joined Aplitec in 1997. He specializes in transaction
switching and interbank settlements. Mr. Soma represented Nedcor Bank in
assisting with the technical specifications for the South African Interbank
Standards. He is also responsible for the ATM settlement process to balance ATMs
with the host as well as balance the host with different card users. Mr. Soma
designed the Stratus Back-End System for Aplitec, and is responsible for the
Nedbank Settlement System for the Point of Sales Devices. Mr. Soma has over 15
years of experience in the development and design of smart card payment systems.
Mr.
Oh
has served as chief executive officer and president since 2007. Prior
to that, he was the Managing Partner at Dasan Accounting Firm and was the Head
of the Investment Banking Division at Daewoo Securities. Mr. Oh is responsible
for the day to day operations of KSNET and as its chief executive officer and
president is instrumental in setting and implementing its strategy and objectives.
Significant
employees
Business
Functions:
Dr.
Gerhard Claassen
(52): General Manager Cryptographic Solutions Dr.
Claasen joined us in August 2000 and is responsible for the marketing and
business development of our cryptographic solutions consisting of the internally
developed Incognito range of security solutions, as well as ToDos authenticators
and the Cybertrust PKI products.
Leonid
Delberg
(65): Managing director: Net1 UTA Mr. Delberg has been the CEO of
Net1 UTA since 1997. Net1 UTA is responsible for the marketing and business
development of our payment solutions in Russia, the CIS, Oman, India and Asia.
Wimpie
du Plessis
(59): Managing director: MediKredit Mrs. du Plessis joined
us in January 1999 and is responsible for the marketing and business development
of our MediKredit offering worldwide.
K.
H. Kang
(45): Division Director - Marketing Division 2 Mr. Kang joined us
in December 1994 and is responsible for KSNETs market division that focuses
primarily on banking VAN, PG and market development.
M.
B. Lee
(46): Division Director - Marketing Division 1 Mr. Lee joined us in
August 1994 and is responsible for KSNETs market division that focuses
primarily on card VAN.
Kanam
Mann
(36): Business Unit Leader: EP Kiosk and General Manager: Chip and GSM
licensing Ms. Mann joined us in February 2005 and is responsible for marketing
and business development of our EP Kiosk and our Chip and GSM licensing
business.
14
Eric
Meniere
(45): Managing director: MVC Mr. Meniere joined us in March 2008
and is responsible for the marketing and business development of our MVC product
in the US.
Nanda
Pillay
(40): General Manager: CPS and EasyPay Mr. Pillay joined us in May
2000 and is responsible for our South African operations, consisting of CPS and
EasyPay.
Richard
Schweger
(47): Financial & operations director: Net1 UTA Mr. Schweger
has been the CFO and COO of Net1 UTA since 1997. Net1 UTA is responsible for the
marketing and business development of our payment solutions in Russia, the CIS,
Oman, India and Asia.
James
Sneedon
(43): Business Unit Leader: VTU Mr. Sneedon joined us January 2001
and is responsible for the marketing and business development of our VTU
products.
Brenda
Stewart
(53): Managing director: Net1 Universal Electronic Technological
Solutions Mrs. Stewart joined us in 1997 and is responsible for the marketing
and business development of our UEPS solutions in Africa (excluding South
Africa) and Iraq.
Mark
Stuckenberg
(49): Managing director: FIHRST Mr. Stuckenberg joined us in
March 2010 and is responsible for the marketing and business development of our
FIHRST offering.
Support
functions:
Chris
Britz
(50): Vice President - Group production, repairs & maintenance
Mr. Britz joined us in April 2001 and is responsible for the groups production
facilities, as well as all internal and external repairs and maintenance of
terminals and other hardware.
Lawrie
Chalmers
(50): Vice President - Group Human Resources Mr. Chalmers joined
us in April 1998 and is responsible for the groups South African human
resources activities, including recruitment, payroll, training and industrial
relations.
Y.
H. Cho
(45): Head of research director Mr. Cho joined us in July 1999 and
is responsible for KSNETs information technology department.
M.
Y. Jun
(43): Head of Strategy, Planning and Finance Mr. Jun joined us in
September 2000 and is responsible for KSNETs financial function, including
financial accounting, taxation and statutory reporting.
Dhruv
Chopra
(37): Vice President: Investor Relations Mr. Chopra joined us in
June 2009 and was previously an analyst at Morgan Stanley, specializing in the
payment processing and IT services sectors.
Paul
Encarnacao
(35): Vice President Finance Mr. Encarnacao joined us in June
2004 and is responsible for the preparation of the groups generally accepted
accounting principles in the United States of America, or US GAAP, consolidated
accounts and statutory reports.
Warren
Segall
(46): Vice President: Compliance Mr. Segall joined us in July 2006
and is our compliance officer.
Trevor
Smit
(54): Vice President: Joint Ventures and Investments Mr. Smit joined
us in May 2007 and provides governance support to our joint ventures as our
representative on the various boards of directors.
Cara
van Straaten
(50): Group Financial Controller Ms. Van Straaten joined us
in July 2004 and is responsible for the groups South African financial
function, including financial accounting, taxation and statutory reporting.
15
ITEM 1A. RISK FACTORS
OUR
OPERATIONS AND FINANCIAL RESULTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES,
INCLUDING THOSE DESCRIBED BELOW, THAT COULD ADVERSELY AFFECT OUR BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS, CASH FLOWS, AND THE TRADING PRICE OF
OUR COMMON STOCK.
Risks Relating to Our Business
We
derive a substantial portion of our revenues from the social welfare grants
distribution service that we perform for SASSA. Our contract with SASSA
currently expires on March 31, 2012, and we are participating in a competitive
tender process for the award of new contracts for all of South Africas nine
provinces. If we do not obtain a new contract and were to discontinue providing
our distribution service to SASSA, we would lose all of these revenues.
We
currently derive a substantial portion of our revenues from the social welfare
grants distribution service that we perform under contract for SASSA, whereby we
distribute these grants in five of the nine provinces of South Africa. SASSA is
our largest customer and for the foreseeable future, our business will be highly
dependent on our SASSA contract. For the years ended June 30, 2011, 2010 and
2009, we derived approximately 47%, 66% and 65%, respectively, of our revenues
from this contract. Our current contract expires on March 31, 2012. In late
April 2011, SASSA commenced a tender process for the award of new contracts. We
are participating in the tender process and have submitted our proposal. If we
do not obtain a new contract and were to discontinue providing our distribution
service to SASSA past the expiration of our current contract, we would lose all
of these revenues.
We
cannot predict with certainty the timing or ultimate outcome of the tender
process and we cannot assure you that it will result in our receiving a contract
to continue to distribute social welfare grants in each of the five South
African provinces where we currently distribute them. Even if we do receive a
new contract, or one or more extensions of the existing contract, we cannot
predict the terms that such contract will contain. Any new contract or extension
we receive may contain pricing or other terms that would be unfavorable to us.
Our
current contract with SASSA is the latest in a series of short-term contracts
and extensions that resulted from the conduct of a tender process which began in
early 2007 and was ultimately terminated by SASSA in late November 2008 without
awarding new contracts. We participated in the tender process and timely
submitted proposals for each of South Africas nine provinces, as well as a
proposal for the entire country. There were a series of extensive delays during
the tender process which resulted in numerous extensions of our bid proposals as
well as an extension of our existing contract. In March 2009, we signed a new
one-year contract with SASSA which expired on March 31, 2010 and which was
subsequently extended to June 30, 2010. We signed our current agreement with
SASSA on August 24, 2010 which was retroactively effective to July 1, 2010. The
contract was originally scheduled to expire on March 31, 2011, was extended to
September 30, 2011 and has been further extended to March 31, 2012.
The
current tender process, as well as the previous one, and the negotiation of the
additional contracts and extensions have consumed a substantial amount of our
managements time and attention during the past four years. Our management has
been required to devote substantial resources to the process which has impacted
their ability to focus on other matters, including potential international
business development activities. In addition, we have initiated several lawsuits
against SASSA, including one which challenged the cancellation of the previous
tender process and another one in which we unsuccessfully challenged SASSAs
right to contract with SAPO to provide banking or payment services relating to
social grant beneficiaries
.
We cannot predict the outcome of our
remaining lawsuits against SASSA, or whether or how our litigation against SASSA
will affect the outcome of the current tender process.
Moreover,
even if we were to receive a new contract or contract extensions containing
similar economic terms to those of our current contract, our profit margin could
be adversely affected to the extent that any such contracts would require us to
incur significant capital expenditures during the initial implementation phase.
Historically, we have incurred a significant portion of the expenses, and
recognized operating losses, associated with these contracts during the initial
implementation phase, which averages approximately 18 months, and have
historically enjoyed higher profit margins on these contracts after the
completion of the implementation period. Therefore, to the extent that we were
to be awarded a new contract that required significant capital expenditures, our
profit margins would be adversely affected if the contract were to be terminated
for any reason during the implementation period.
Finally,
if we were to be awarded one or more contracts by SASSA, an unsuccessful
tenderor could seek to challenge the award, which could result in the contract
being set aside or could require us to expend time and resources in an attempt
to defeat any such challenge.
16
Our
current contract with SASSA is less favorable to us than our previous contract
which has adversely affected our results of operations. Furthermore, the terms
of any further renewals or extensions or a contract awarded under the current
tender process may be even less favorable to us than the current contract. To
the extent that we are unsuccessful in diversifying our business and reducing
our dependence on SASSA, our business and profitability will likely suffer.
Our
current contract with SASSA contains a standard pricing formula for all
provinces based on a transaction fee per beneficiary paid, regardless of the
number or amount of grants paid per beneficiary, calculated on a guaranteed
minimum number of beneficiaries per month. The current contract is less
favorable to us than the one it replaced. Because we continue to derive a
substantial percentage of our revenues from our SASSA contract, the terms of the
current contract have adversely affected our revenues and operating income.
Further, as described in the immediately preceding risk factor, it is possible
that any further extension or renewal of the current contract or a contract
which we may be awarded under the recently initiated tender process may be even
less favorable to us. While we are making significant efforts to reduce our
dependence on our SASSA contract by diversifying our business in South Africa
and expanding internationally, to the extent that these efforts are not
successful, we may not be able to offset the effects of the current and possible
future less favorable terms from SASSA which would have a material adverse
effect on our results of operations, financial position and cash flows.
We
were unsuccessful in our lawsuit against SASSA challenging SASSAs right to
contract with SAPO to provide banking or payment services relating to social
grant beneficiaries. If SASSA provides this business to SAPO rather than to us,
the revenue and operating income we derive from our current SASSA contract could
be substantially reduced, which could have a material adverse effect on
us.
In
2009, we instituted a lawsuit against SASSA in the South African High Court, or
High Court, in which we challenged SASSAs right to contract with SAPO to
provide banking or payment services relating to social grant beneficiaries. The
High Court ruled in our favor and prohibited SASSA from contracting with SAPO
for these services, finding that SASSA had not followed a proper procurement
process to comply with the South African Constitution and the Public Finance
Management Act, or PFMA, when the previous executive management team at SASSA
contracted with SAPO for the payment of grants in 2009. SASSA appealed the High
Courts judgment to the South African Supreme Court of Appeal, which overturned
the High Courts judgment in March 2011. We applied for leave to appeal to the
South African Constitutional Court, which was denied in June 2011. Although our
SASSA contract remains in effect through its current expiration date of March
31, 2012, the failure of our court challenge has enabled SASSA to pursue
contracts with SAPO to provide banking or payment services relating to social
grant beneficiaries, which would reduce the number of beneficiaries we serve
under our SASSA contract. Although our SASSA contract guarantees us a
transaction fee per beneficiary based on a guaranteed minimum number of
beneficiaries, our revenues from the contract would suffer from a diversion of
business to SAPO because presently we serve more than the minimum number of
beneficiaries. Because we continue to derive a substantial portion of our
revenue from our SASSA contract, if this source of revenue were to decline
substantially, our results of operations, financial condition and cash flows
would suffer.
We
may undertake acquisitions that could increase our costs or liabilities or be
disruptive to our business.
Acquisitions
are a significant part of our long-term growth strategy as we seek to grow our
business internationally and to deploy our technologies in new markets both
inside and outside South Africa. However, we may not be able to locate suitable
acquisition candidates at prices that we consider appropriate. If we do identify
an appropriate acquisition candidate, we may not be able to successfully
negotiate the terms of an acquisition, finance the acquisition or, if the
acquisition occurs, integrate the acquired business into our existing business.
These transactions may require debt financing or additional equity financing,
resulting in additional leverage or dilution of ownership.
Acquisitions
of businesses or other material operations and the integration of these
acquisitions will require significant attention from our senior management which
may divert their attention from our day to day business. The difficulties of
integration may be increased by the necessity of coordinating geographically
dispersed organizations, integrating personnel with disparate business
backgrounds and combining different corporate cultures. We also may not be able
to maintain key employees or customers of an acquired business or realize cost
efficiencies or synergies or other benefits that we anticipated when selecting
our acquisition candidates. Finally, acquisition candidates may have liabilities
or adverse operating issues that we fail to discover through due diligence prior
to the acquisition.
17
We
have had to record impairments of our intangible assets related to a prior
acquisition, which negatively affected our earnings for fiscal 2011 and 2010. We
may need to record additional writedowns from any future impairments, which
could reduce our future reported earnings.
As
a result of our acquisitions, a significant portion of our total assets consist
of intangible assets (including goodwill). Goodwill and intangible assets, net
of amortization, together accounted for approximately 42% and 31% of the total
assets on our balance sheet as of June 30, 2011 and 2010, respectively. We may
not realize the full fair value of our intangible assets and goodwill. We expect
to engage in additional acquisitions, which may result in our recognition of
additional intangible assets and goodwill. We evaluate on a regular basis
whether all or a portion of our goodwill and other intangible assets may be
impaired. Under current accounting rules, any determination that impairment has
occurred would require us to write off the impaired portion of goodwill and such
intangible assets, resulting in a charge to our earnings. For example, during
fiscal years 2011 and 2010, we recorded aggregate goodwill and intangible asset
impairment charges of approximately $79.2 million related to our August 2008
acquisition of Net 1 UTA. Specifically, in the third quarter of fiscal 2011, we
recognized an impairment loss of approximately $41.8 million related to acquired
Net1 UTA customer relationships. This loss was in addition to an impairment loss
of $37.4 million we recorded in the fourth quarter of fiscal 2010. These
impairment losses substantially reduced our operating income for the relevant
periods. Additional impairment charges could adversely affect our financial
condition and results of operations.
We
have a significant amount of indebtedness that requires us to comply with
restrictive and financial covenants. If we are unable to comply with these
covenants, we could default on this debt, which would have a material adverse
effect on our business and financial condition.
As
of June 30, 2011, we had approximately $121 million of outstanding indebtedness,
which we incurred to finance the KSNET acquisition. These loans are secured by
substantially all of KSNETs assets, a pledge by Net1 Korea of its entire equity
interest in KSNET and a pledge by the immediate parent of Net1 Korea (also one
of our subsidiaries) of its entire equity interest in Net1 Korea. The terms of
the loan facility require Net1 Korea and its consolidated subsidiaries to
maintain certain specified financial ratios (including a leverage ratio and a
debt service coverage ratio) and restrict their ability to make certain
distributions with respect to their capital stock, prepay other debt, encumber
their assets, incur additional indebtedness, make capital expenditures above
specified levels, engage in certain business combinations and engage in other
corporate activities. Although these covenants only apply to our Korean
subsidiaries, these security arrangements and covenants may reduce our operating
flexibility or our ability to engage in other transactions that may be
beneficial to us. If we are unable to comply with these covenants, we could be
in default and the indebtedness could be accelerated. If this were to occur, we
might not be able to obtain waivers of default or to refinance the debt with
another lender and as a result, our business and financial condition would
suffer.
A
prolonged economic slowdown or lengthy or severe recession in South Africa or
elsewhere could harm our operations.
A
prolonged economic downturn or recession could materially impact our results
from operations. A recessionary economic environment could have a negative
impact on mobile phone operators, our cardholders and retailers and could reduce
the level of transactions we process and the take-up of financial services we
offer, which would, in turn, negatively impact our financial results. If
financial institutions and retailers experience decreased demand for their
products and services our hardware, software and related technology sales will
reduce, resulting in lower revenue.
The
loss of the services of Dr. Belamant or any of our other executive officers
would adversely affect our business.
Our
future financial and operational performance depends, in large part, on the
continued contributions of our senior management, in particular, Dr. Serge
Belamant, our Chief Executive Officer and Chairman and Herman Kotze, our Chief
Financial Officer. Many of our key responsibilities are performed by these two
individuals, and the loss of the services of either of them could disrupt our
development efforts or business relationships and our ability to continue to
innovate and to meet customers needs, which could have a material adverse
effect on our business and financial performance. We do not have employment
agreements with these executive officers and they may terminate their employment
at any time.
In
addition, the success of our KSNET business depends heavily on the continued
services of its president, Phil-Hyun Oh and the other senior members of the
KSNET management team. We do not maintain any key person life insurance
policies.
18
We
face a highly competitive employment market and may not be successful in
attracting and retaining a sufficient number of skilled employees, particularly
in the technical and sales areas and senior management.
Our
future success depends on our ability to continue to develop new products and to
market these products to our target users. In order to succeed in our product
development and marketing efforts, we need to identify, attract, motivate and
retain sufficient numbers of qualified technical and sales personnel. An
inability to hire and retain such technical personnel would adversely affect our
ability to enhance our existing intellectual property, to introduce new
generations of technology and to keep abreast of current developments in
technology. Demand for personnel with the range of capabilities and experience
we require is high and there is no assurance that we will be successful in
attracting and retaining these employees. The risk exists that our technical
skills and sales base may be depleted over time because of natural attrition.
Furthermore, social and economic factors in South Africa have led, and continue
to lead, numerous qualified individuals to leave the country, thus depleting the
availability of qualified personnel in South Africa. In addition, our
multi-country strategy will also require us to hire and retain highly qualified
managerial personnel in each of these markets. If we cannot recruit and retain
people with the appropriate capabilities and experience and effectively
integrate these people into our business, it could negatively affect our product
development and marketing activities.
We
face competition from the incumbent retail banks in South Africa and SAPO in the
unbanked market segment, which could limit growth in our transaction-based
activities segment.
The
incumbent South African retail banks have created a common banking product,
generally referred to as a Mzansi account, for unbanked South Africans, which
offers limited transactional capabilities at reduced charges, when compared to
the accounts traditionally offered by these banks. According to the FinScope
survey, which is an annual survey conducted by the FinMark Trust, a non-profit
independent trust, approximately 4.4 million and 3.5 million people in South
Africa claimed to use a Mzansi account in 2009 and 2008, respectively. The 2009
survey also indicated that 22% of those surveyed opened a Mzansi account in
order to receive a social welfare grant. In addition, SAPO also offers a Mzansi
product which is used by some social welfare grant recipients to receive their
social grants.
It
is possible for a social welfare beneficiary to receive grants through a Mzansi
or other low-cost banking account. SASSA does not pay us a fee for the
disbursement of grants through Mzansi or other low cost bank accounts and to the
extent that beneficiaries use these accounts, rather than our smart card, to
receive their grants, we will not be able to generate additional revenues from
retail spending by these beneficiaries. In contrast, when a beneficiary receives
grants through our smart card, we are able to generate incremental revenues from
the use of our card in our merchant acquiring system because merchants
participating in our merchant acquiring systems are also able to accept
UEPS-based smart cards. Thus, our ability to increase our revenues and operating
margins will be adversely affected to the extent that there is an increase in
the number or percentage of South Africans using Mzansi or other low cost bank
accounts to receive their social welfare grants.
Moreover,
as our product offerings increase and gain market acceptance in South Africa,
the banks and SAPO may seek governmental or other regulatory intervention if
they view us as disrupting their funds transfer or other businesses.
We
may face competition from other companies that offer smart card technology,
other innovative payment technologies and payment processing, which could result
in loss of our existing business and adversely impact our ability to
successfully market additional products and services.
Our
primary competitors in the payment processing market include other independent
processors, as well as financial institutions, independent sales organizations,
and, potentially card networks. Many of our competitors are companies who are
larger than we are and have greater financial and operational resources than we
have. These factors may allow them to offer better pricing terms to customers,
which could result in a loss of our potential or current customers or could
force us to lower our prices as well. Either of these actions could have a
significant effect on our revenues and earnings.
In
addition to competition that our UEPS system faces from the use of cash, checks,
credit and debit cards, existing payment systems and the providers of financial
services and low cost bank accounts, there are a number of other products that
use smart card technology in connection with a funds transfer system. During the
past several years, smart card technology has become increasingly prevalent. We
believe that the most competitive product in this marketplace is EMV, a system
that is promoted by most of the major card companies such as Visa, Mastercard,
JCB and American Express. Also, governments and financial institutions are, to
an increasing extent, implementing general-purpose reloadable prepaid cards as a
low-cost alternative to provide financial services to the unbanked population.
Moreover, while we see the acceptance over time of using a mobile phone to
facilitate financial services as an opportunity, there is a risk that other
companies will be able to introduce such services to the marketplace
successfully and that customers may prefer those services to ours, based on
technology, price or other factors.
19
The
period between our initial contact with a potential customer and the sale of our
UEPS products or services to that customer tends to be long and may be subject
to delays which may have an impact on our revenues.
The
period between our initial contact with a potential customer and the purchase of
our UEPS products and services is often long and subject to delays associated
with the budgeting, approval and competitive evaluation processes that
frequently accompany significant capital expenditures. A lengthy sales cycle may
have an impact on the timing of our revenues, which may cause our quarterly
operating results to fall below investor expectations. A customers decision to
purchase our products and services is often discretionary, involves a
significant commitment of resources, and is influenced by customer budgetary
cycles. To sell our products and services successfully we generally must educate
our potential customers regarding the uses and benefits of our products and
services, which can require the expenditure of significant time and resources;
however, there can be no assurance that this significant expenditure of time and
resources will result in actual sales of our products and services.
Our
proprietary rights may not adequately protect our
technologies.
Our
success depends in part on our obtaining and maintaining patent, trade secret,
copyright and trademark protection of our technologies in the United States and
other jurisdictions as well as successfully enforcing this intellectual property
and defending this intellectual property against third-party challenges. We will
only be able to protect our technologies from unauthorized use by third parties
to the extent that valid and enforceable intellectual property protections, such
as patents or trade secrets, cover them. In particular, we place considerable
emphasis on obtaining patent and trade secret protection for significant new
technologies, products and processes. Furthermore, the degree of future
protection of our proprietary rights is uncertain because legal means afford
only limited protection and may not adequately protect our rights or permit us
to gain or keep our competitive advantage.
We
cannot predict the breadth of claims that may be allowed or enforced in our
patents. For example, we might not have been the first to make the inventions
covered by each of our patents and patent applications or to file patent
applications and it is possible that none of our pending patent applications
will result in issued patents. It is possible that others may independently
develop similar or alternative technologies. Also, our issued patents may not
provide a basis for commercially viable products, or may not provide us with any
competitive advantages or may be challenged, invalidated or circumvented by
third parties.
We
also rely on trade secrets to protect our technology, especially where we
believe patent protection is not appropriate or obtainable. However, trade
secrets are difficult to protect. We have confidentiality agreements with
employees, and consultants to protect our trade secrets and proprietary
know-how. These agreements may be breached and or may not have adequate remedies
for such breach. While we use reasonable efforts to protect our trade secrets,
our employees, consultants or others may unintentionally or willfully disclose
our information to competitors. If we were to enforce a claim that a third party
had illegally obtained and was using our trade secrets, our enforcement efforts
would be expensive and time consuming, and the outcome would be unpredictable.
Moreover, if our competitors independently develop equivalent knowledge, methods
and know-how, it will be more difficult for us to enforce our rights and our
business could be harmed. If we are not able to defend the patent or trade
secret protection position of our technologies, then we will not be able to
exclude competitors from developing or marketing competing technologies.
We
also rely on trademarks to establish a market identity for some of our products.
To maintain the value of our trademarks, we might have to file lawsuits against
third parties to prevent them from using trademarks confusingly similar to or
dilutive of our registered or unregistered trademarks. Also, we might not obtain
registrations for our pending trademark applications, and might have to defend
our registered trademark and pending trademark applications from challenge by
third parties.
Defending
our intellectual property rights or defending ourselves in infringement suits
that may be brought against us is expensive and time-consuming and may not be
successful.
Litigation
to enforce our patents, trademarks or other intellectual property rights or to
protect our trade secrets could result in substantial costs and may not be
successful. Any loss of, or inability to protect, intellectual property in our
technology could diminish our competitive advantage and also seriously harm our
business. In addition, the laws of certain foreign countries may not protect our
intellectual property rights to the same extent as do the laws in countries
where we currently have patent protection. Our means of protecting our
intellectual property rights in countries where we currently have patent or
trademark protection, or any other country in which we operate, may not be
adequate to fully protect our intellectual property rights. Similarly, if third
parties claim that we infringe their intellectual property rights, we may be
required to incur significant costs and devote substantial resources to the
defense of such claims. We may be required to discontinue using and selling any
infringing technology and services, to expend resources to develop
non-infringing technology or to purchase licenses or pay royalties for other
technology. In addition, if we are unsuccessful in defending any such
third-party claims, we could suffer costly judgments and injunctions that could
materially adversely affect our business, results of operations or financial
condition.
20
System
failures, including breaches in the security of our system, could harm our
business.
We
may experience system failures from time to time, and any lengthy interruption
in the availability of our back-end system computer could harm our revenues and
profits, and could subject us to the scrutiny of our customers.
Frequent
or persistent interruptions in our services could cause current or potential
customers and users to believe that our systems are unreliable, leading them to
avoid our technology altogether, and could permanently harm our reputation and
brands. These interruptions would increase the burden on our engineering staff,
which, in turn, could delay our introduction of new applications and services.
Finally, because our customers may use our products for critical transactions,
any system failures could result in damage to our customers businesses. These
customers could seek significant compensation from us for their losses. Even if
unsuccessful, this type of claim could be time consuming and costly for us to
address.
Although
our systems have been designed to reduce downtime in the event of outages or
catastrophic occurrences, they remain vulnerable to damage or interruption from
earthquakes, floods, fires, power loss, telecommunication failures, terrorist
attacks, computer viruses, computer denial-of-service attacks and similar
events. Some of our systems are not fully redundant, and our disaster recovery
planning may not be sufficient for all eventualities.
Protection
against fraud is of key importance to the purchasers and end users of our
solutions. We incorporate security features, including encryption software,
biometric identification and secure hardware, into our solutions to protect
against fraud in electronic transactions and to provide for the privacy and
integrity of card holder data. Our solutions may be vulnerable to breaches in
security due to defects in the security mechanisms, the operating system and
applications or the hardware platform. Security vulnerabilities could jeopardize
the security of information transmitted using our solutions. If the security of
our solutions is compromised, our reputation and marketplace acceptance of our
solutions will be adversely affected, which would cause our business to suffer,
and we may become subject to damage claims. We have not yet experienced any
security breaches affecting our business.
Despite
any precautions we may take, the occurrence of a natural disaster or other
unanticipated problems with our system could result in lengthy interruptions in
our services. Our current business interruption insurance may not be sufficient
to compensate us for losses that may result from interruptions in our service as
a result of system failures.
Our
strategy of partnering with companies outside South Africa may not be
successful.
In
order for us to expand our operations into foreign markets, it may be necessary
for us to establish partnering arrangements with companies outside South Africa,
such as the ones we have established in Namibia, Botswana, Nigeria and Colombia.
The success of these endeavors is, however, subject to a number of factors over
which we have little or no control, such as finding suitable partners with the
appropriate financial, business and technical backing and continued governmental
support for planned implementations. In some countries, finding suitable
partners and obtaining the appropriate support from the government involved may
take a number of years before we can commence implementation. Some of these
partnering arrangements may take the form of joint ventures in which we receive
a minority interest. Minority ownership carries with it numerous risks,
including dependence on partners to provide knowledge of local market conditions
and to facilitate the acquisition of any necessary licenses and permits, as well
as the inability to control the joint venture vehicle and to direct its policies
and strategies. Such a lack of control could result in the loss of all or part
of our investment in such entities. In addition, our foreign partners may have
different business methods and customs which may be unfamiliar to us and with
which we disagree. Our joint venture partners may not be able to implement our
business model in new areas as efficiently and quickly as we have been able to
do in South Africa. Furthermore, limitations imposed on our South African
subsidiaries by South African exchange control regulations, as well as
limitations imposed on us by the Investment Company Act of 1940, may limit our
ability to establish partnerships or entities in which we do not obtain a
controlling interest.
We
may have difficulty managing our growth, especially as we expand our business
internationally.
We
continue to experience growth, both in the scope of our operations and size of
our organization. This growth is placing significant demands on our management,
especially as we expand our business internationally. Continued growth would
increase the challenges involved in implementing appropriate operational and
financial systems, expanding our technical and sales and marketing
infrastructure and capabilities, providing adequate training and supervision to
maintain high quality standards, and preserving our culture and values.
International growth, in particular, means that we must become familiar and
comply with complex laws and regulations in other countries, especially laws
relating to taxation.
Additionally,
continued growth will place significant additional demands on our management and
our financial and operational resources, and will require that we continue to
develop and improve our operational, financial and other internal controls. If
we cannot scale and manage our business appropriately, we will not experience
our projected growth and our financial results may suffer.
21
We
pre-fund the payment of social welfare grants through our merchant acquiring
system in South Africa and pre-fund the settlement of certain customers in Korea
and a significant level of payment defaults by these merchants or customers
would adversely affect us.
We
pre-fund social welfare grants through the merchants who participate in our
merchant acquiring system in the South African provinces where we operate as
well as prefund the settlement of funds to certain customers in Korea. These
pre-funding obligations expose us to the risk of default by these merchants and
customers. Although we have not experienced any material defaults by merchants
or customers in the return of pre-funded amounts to us, we cannot guarantee that
material defaults will not occur in the future. A material level of merchant or
customer defaults could have a material adverse effect on us, our financial
position and results of operations.
We
may incur material losses in connection with our distribution of cash to
recipients of social welfare grants.
Many
social welfare recipients use our services to access cash using their smart
cards. We use armored vehicles to deliver large amounts of cash to rural areas
across South Africa to enable these welfare recipients to receive this cash. In
some cases, we also store the cash that will be delivered by the armored
vehicles in depots overnight or over the weekend to facilitate delivery to these
rural areas. We cannot insure against the risk of loss or theft of cash from our
delivery vehicles as we have not identified any insurance underwriters willing
to accept this risk on reasonable terms. Therefore, we will bear the full cost
of any loss or theft in connection with the delivery process, and such loss
could materially and adversely affect our financial condition, cash flows and
results of operations. The Company did not incur any material losses resulting
from cash distribution during fiscal 2011, 2010 and 2009, but there is no
assurance that we will not incur material losses in the future.
We
depend upon third-party suppliers, making us vulnerable to supply shortages
and price fluctuations, which could harm our business.
We
obtain our smart cards, POS devices and the other hardware we use in our
business from a limited number of suppliers, and do not manufacture this
equipment ourselves. We generally do not have long-term agreements with our
manufacturers or component suppliers. If our suppliers become unwilling or
unable to provide us with adequate supplies of parts or products when we need
them, or if they increase their prices, we may not be able to find alternative
sources in a timely manner and could be faced with a critical shortage. This
could harm our ability to implement new systems and cause our revenues to
decline. Even if we are able to secure alternative sources in a timely manner,
our costs could increase. A supply interruption or an increase in demand beyond
current suppliers capabilities could harm our ability to distribute our
equipment and thus, to acquire a new source of customers who use our UEPS
technology. Any interruption in the supply of the hardware necessary to operate
our technology, or our inability to obtain substitute equipment at acceptable
prices in a timely manner, could impair our ability to meet the demand of our
customers, which would have an adverse effect on our business.
Shipments
of our electronic payment systems may be delayed by factors outside of our
control, which can harm our reputation and our relationships with our customers.
The
shipment of payment systems requires us or our manufacturers, distributors or
other agents to obtain customs or other government certifications and approvals
and, on occasion, to submit to physical inspection of our systems in transit.
Failure to satisfy these requirements, and the very process of trying to satisfy
them, can lead to lengthy delays in the delivery of our solutions to our direct
or indirect customers. Delays and unreliable delivery by us may harm our
reputation and our relationships with our customers.
22
Risks Relating to Operating in South Africa and Other
Foreign Markets
Fluctuations
in the value of the South African rand have had, and will continue to have, a
significant impact on our reported results of operations, which may make it
difficult to evaluate our business performance between reporting periods and may
also adversely affect our stock price.
The
South African rand, or ZAR, is the primary operating currency for our business
operations while our financial results are reported in US dollars. This means
that as long as the ZAR remains our primary operating currency, depreciation in
the ZAR against the US dollar, and to a lesser extent, the euro, would
negatively impact our reported revenue and net income, while a strengthening of
the ZAR would have the opposite effect. Depreciation in the ZAR may negatively
impact the prices at which our stock trades. The US dollar/ZAR exchange rate has
historically been volatile and we expect this volatility to continue. The ZAR
was significantly weaker overall during 2009 than during 2011 and 2010, which
negatively affected our reported 2009 results of operations when compared to
2011 and 2010. We provide detailed information about historical exchange rates
in Item 7Managements Discussion and Analysis of Financial Condition and
Results of OperationsCurrency Exchange Rate Information.
Due
to the significant fluctuation in the value of the ZAR and its impact on our
reported results, you may find it difficult to compare our results of operations
between financial reporting periods even though we provide supplemental
information about our results of operations determined on a ZAR basis. This
difficulty may increase as we expand our business internationally and record
additional revenue and expenses in the euro and other currencies. It may also
have a negative impact on our stock price.
We
generally do not engage in any currency hedging transactions intended to reduce
the effect of fluctuations in foreign currency exchange rates on our results of
operations, other than economic hedging relating to our inventory purchases
which are settled in US dollars or euros. We have used forward contracts in
order to hedge our economic exposure to the ZAR/US dollar and ZAR/euro exchange
rate fluctuations from these foreign currency transactions. We cannot guarantee
that we will enter into hedging transactions in the future or, if we do, that
these transactions will successfully protect us against currency fluctuations.
South
Africas high levels of poverty, unemployment and crime may increase our costs
and impair our ability to maintain a qualified workforce.
While
South Africa has a highly developed financial and legal infrastructure, it also
has high levels of crime and unemployment and there are significant differences
in the level of economic and social development among its people, with large
parts of the population, particularly in the rural areas, having limited access
to adequate education, healthcare, housing and other basic services, including
water and electricity. In addition, South Africa has a high prevalence of
HIV/AIDS and tuberculosis. Government policies aimed at alleviating and
redressing the disadvantages suffered by the majority of citizens under previous
governments may increase our costs and reduce our profitability, all of which
could negatively affect our business. These problems may prompt emigration of
skilled workers, hinder investment into South Africa and impede economic growth.
As a result, we may have difficulties attracting and retaining qualified
employees.
The
economy of South Africa is exposed to high inflation and interest rates which
could increase our operating costs and thereby reduce our
profitability.
The
economy of South Africa in the past has been, and in the future may continue to
be, characterized by rates of inflation and interest rates that are
substantially higher than those prevailing in the United States and other highly
developed economies. High rates of inflation could increase our South
African-based costs and decrease our operating margins. Although higher interest
rates would increase the amount of income we earn on our cash balances, they
would also adversely affect our ability to obtain cost-effective debt financing
in South Africa.
23
If
we do not achieve applicable black economic empowerment objectives in our South
African businesses, we risk losing our government and private contracts. In
addition, it is possible that we may be required to achieve black shareholding
of our company in a manner that could dilute your ownership.
The
South African government, through the Broad-Based Black Economic Empowerment
Act, 2003, established a legislative framework for the promotion of BEE. The law
recognizes two distinct mechanisms for the achievement of BEE
objectivescompliance with codes of good practice, which have already been
issued, and compliance with industry-specific transformation charters. Although
the charter that will likely apply to our company has not yet been finalized, we
believe it is likely that the charter will not differ substantially from the
codes of good practice. Achievement of BEE objectives is measured by a
scorecard which establishes a weighting to various components of BEE. One
component of BEE is achieving a certain percentage of shareholdings by black
South Africans in South African businesses over a period of years. This
shareholding component carries the highest BEE scorecard weighting. Other
components include procuring goods and services from black-owned businesses or
from businesses that have earned good BEE scores and achieving certain levels of
black South African employment. Compliance with the codes and applicable
charters are not enforced through civil or criminal sanction, but compliance
does affect the ability of a company to secure contracts in the public and
private sectors. Thus, it will be important for us to achieve applicable BEE
objectives. Failing to do so could jeopardize our ability to maintain existing
business, including our South African pension and welfare business, or to secure
future business.
We
have taken a number of actions as a company to increase empowerment of black
South Africans. However, it is possible that these actions may not be sufficient
to enable us to achieve applicable BEE objectives. In that event, in order to
avoid risking the loss of our government and private contracts, we may have to
seek to comply through other means, including by selling shares of Net1 or of
our South African subsidiaries to black South Africans. Such sales of shares
could have a dilutive impact of your ownership interest, which could cause the
market price of our stock to decline.
South
African exchange control regulations could hinder our ability to make foreign
investments and obtain foreign-denominated financing.
South
Africas exchange control regulations restrict the export of capital from South
Africa, the Republic of Namibia and the Kingdoms of Lesotho and Swaziland, known
collectively as the Common Monetary Area without the prior approval of SARB.
While the South African government has relaxed exchange controls in recent
years, it is difficult to predict whether or how it will further relax or
abolish exchange control measures in the foreseeable future.
Although
Net1 is a US corporation and is not itself subject to South African exchange
control regulations, these regulations do restrict the ability of our South
African subsidiaries to raise and deploy capital outside the Common Monetary
Area, to borrow money in currencies other than the South African rand and to
hold foreign currency. Exchange control restrictions may also affect the ability
of these subsidiaries to pay dividends to Net1 unless the affected subsidiary
can show that any payment of such dividend will not place it in an over-borrowed
position. As of June 30, 2011, approximately 76% of our cash and cash
equivalents were held by our South African subsidiaries. Exchange control
regulations could make it difficult for our South African subsidiaries to: (i)
export capital from South Africa; (ii) hold foreign currency or incur
indebtedness denominated in foreign currencies without the approval of SARB;
(iii) acquire an interest in a foreign venture without the approval of SARB and
first having complied with the investment criteria of SARB; (iv) repatriate to
South Africa profits of foreign operations; and (v) limit our business to
utilize profits of one foreign business to finance operations of a different
foreign business.
Under
current exchange control regulations, SARB approval would be required for any
acquisition of our company which would involve payment to our South African
shareholders of any consideration other than South African rand. This
restriction could limit our management in its ability to consider strategic
options and thus, our shareholders may not be able to realize the premium over
the current trading price of our shares.
Most
of South Africas major industries are unionized, and the majority of employees
belong to trade unions. We face the risk of disruption from labor disputes and
new South African labor laws.
In
the past, trade unions have had a significant impact on the collective
bargaining process as well as on social and political reform in South Africa in
general. Although only approximately 12% percent of our workforce is unionized
and we have not experienced any labor disruptions in recent years, such labor
disruptions may occur in the future. In addition, developments in South African
labor laws may increase our costs or alter our relationship with our employees
and trade unions, which may have an adverse effect on us, our financial
condition and our operations.
24
Operating
in South Africa and other emerging markets subjects us to greater risks than
those we would face if we operated in more developed markets.
Emerging
markets such as South Africa, as well as some of the other markets into which we
have recently begun to expand, including African countries outside South Africa,
South America, Southeast Asia and Central and Eastern Europe, are subject to
greater risks than more developed markets. While we focus our business primarily
on emerging markets because that is where we perceive there to be the greatest
opportunities to market our products and services successfully, the political,
economic and market conditions in many of these markets present risks that could
make it more difficult to operate our business successfully.
Some
of these risks include:
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political and economic instability, including higher
rates of inflation and currency fluctuations;
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high levels of corruption, including bribery of public
officials;
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loss due to civil strife, acts of war or terrorism,
guerrilla activities and insurrection;
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a lack of well-developed legal systems which could make
it difficult for us to enforce our intellectual property and contractual
rights;
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logistical and communications challenges;
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potential adverse changes in laws and regulatory
practices, including import and export license requirements and
restrictions, tariffs, legal structures and tax laws;
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difficulties in staffing and managing operations and
ensuring the safety of our employees;
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restrictions on the right to convert or repatriate
currency or export assets;
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greater risk of uncollectible accounts and longer
collection cycles;
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indigenization and empowerment programs; and
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exposure to liability under US securities and foreign
trade laws, including the Foreign Corrupt Practices Act, or FCPA, and
regulations established by the US Department of Treasurys Office of
Foreign Assets Control, or OFAC.
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Many
of these countries and regions are in various stages of developing institutions
and political, legal and regulatory systems that are characteristic of
democracies. However, institutions in these countries and regions may not yet be
as firmly established as they are in democracies in the developed world. Many of
these countries and regions are also in the process of transitioning to a market
economy and, as a result, are experiencing changes in their economies and their
government policies that can affect our investments in these countries and
regions. Moreover, the procedural safeguards of the new legal and regulatory
regimes in these countries and regions are still being developed and, therefore,
existing laws and regulations may be applied inconsistently. In some
circumstances, it may not be possible to obtain the legal remedies provided
under those laws and regulations in a timely manner.
As
the political, economic and legal environments remain subject to continuous
development, investors in these countries and regions face uncertainty as to the
security of their investments. Any unexpected changes in the political or
economic conditions in these or neighboring countries or others in the region
may have a material adverse effect on the international investments that we have
made or may make in the future, which may in turn have a material adverse effect
on our business, operating results, cash flows and financial condition.
Risks Relating to Government Regulation
We
are required to comply with certain US laws and regulations, including the
Foreign Corrupt Practices Act as well as economic and trade sanctions, which
could adversely impact our future growth.
We
must comply with the FCPA, which prohibits US companies or their agents and
employees from providing anything of value to a foreign official for the
purposes of influencing any act or decision of these individuals in their
official capacity to help obtain or retain business, direct business to any
person or corporate entity or obtain any unfair advantage. In addition, OFAC
administers and enforces economic and trade sanctions against targeted foreign
countries, entities and individuals based on US foreign policy and national
security goals.
25
Any
failure by us to adopt appropriate compliance procedures and ensure that our
employees, agents and business partners comply with the FCPA could subject us to
substantial penalties. In addition, the requirement that we comply with the FCPA
could put us at a competitive disadvantage with companies that are not required
to comply with the FCPA or could otherwise harm our business. For example, in
many emerging markets, there may be significant levels of official corruption,
and thus, bribery of public officials may be a commonly accepted cost of doing
business. Our refusal to engage in illegal behavior, such as paying bribes, may
result in us not being able to obtain business that we might otherwise have been
able to secure or possibly even result in unlawful, selective or arbitrary
action being taken against us by foreign officials. Furthermore, the trade
sanctions administered and enforced by OFAC target countries which are typically
less developed countries. Since less developed countries present some of the
best opportunities for us to expand our business internationally, restrictions
against entering into transactions with those foreign countries, as well as with
certain entities and individuals in those countries, can adversely affect our
ability to grow our business.
Changes
in current South African government regulations relating to social welfare grants
could adversely affect our revenues and cash flows.
We
derive a substantial portion of our current business from the distribution of
social welfare grants onto smart cards in South Africa and the transaction fees
resulting from use of these smart cards. Because social welfare eligibility and
grant amounts are regulated by the South African government, any changes to or
reinterpretations of the government regulations relating to social welfare may
result in the non-renewal or reduction of grants for certain individuals, or a
determination that currently eligible social welfare grant recipients are no
longer eligible. If any of these changes were to occur, the number of smart
cards in use could decrease, the amount of money on any particular smart card
could decrease or the amount of transactions effected on any particular smart
card may decrease, all of which could result in a reduction of our revenues and
cash flows.
We
do not have a South African banking license and therefore we provide our wage
payment solution through an arrangement with a third-party bank, which limits
our control over this business and the economic benefit we derive from it. If
this arrangement were to terminate, we would not be able to operate our wage
payment business without alternate means of access to a banking
license
The
South African retail banking market is highly regulated, but the South African
government has identified the need to service the unbanked market through the
liberalization of the regulatory environment in order for retailers and
non-banking service providers to innovate products and delivery channels for the
unbanked market. However, under current law and regulations, a portion of our
South African wage payment business activities in the unbanked market requires
us to be registered as a bank in South Africa or to have access to an existing
banking license. We are not currently so registered, but we have entered into an
agreement with Grindrod Bank Limited that enables us to implement our wage
payment solution in compliance with the relevant laws and regulations. If the
agreement were to be terminated, we would not be able to operate our wage
payment business unless we were able to obtain access to a banking license
through alternate means.
In
addition, the South African Financial Advisory and Intermediary Services Act,
2002, requires persons who give advice regarding the purchase of financial
products or who act as intermediaries between financial product suppliers and
consumers in South Africa to register as financial service providers. We have
applied for a license under this Act in order to continue to provide advice and
intermediary services in respect of the financial products on which we advise
and the payment processing services we provide in South Africa on behalf of
insurers and other financial product suppliers. If we fail to obtain this
license, we may be stopped from continuing this part of our business in South
Africa.
Our
payment processing businesses are subject to substantial governmental regulation
and may be adversely affected by liability under, or any future inability to
comply with, existing or future regulations or requirements.
Our
payment processing activities are subject to extensive regulation. Compliance
with the requirements under these various regulatory regimes may cause us to
incur significant additional costs and failure to comply with such requirements
could result in the shutdown of the non-complying facility, the imposition of
liens, fines and/or civil or criminal liability.
26
We
may be subject to regulations regarding privacy, data use and/or security which
could adversely affect our business.
We
are subject to regulations in a number of the countries in which we operate
relating to the collection, use, retention, security and transfer of personally
identifiable information about the people who use our products and services, in
particular, personal financial and health information. New laws in this area
have been passed by several jurisdictions, and other jurisdictions are
considering imposing additional restrictions. The interpretation and application
of user data protection laws are in a state of flux. These laws may be
interpreted and applied inconsistently from country to country and our current
data protection policies and practices may not be consistent with those
interpretations and applications. Complying with these varying requirements
could cause us to incur substantial costs or require us to change our business
practices in a manner adverse to our business. Any failure, or perceived
failure, by us to comply with any regulatory requirements or international
privacy or consumer protection-related laws and regulations could result in
proceedings or actions against us by governmental entities or others, subject us
to significant penalties and negative publicity and adversely affect us. In
addition, as noted above, we are subject to the possibility of security
breaches, which themselves may result in a violation of these laws.
Risks Relating to our Common Stock
Our
stock price has been and may continue to be volatile.
Our
stock price has experienced recent significant volatility. During the 2011
fiscal year, our stock price ranged from a low of $8.24 to a high of $15.04. We
expect that the trading price of our common stock may continue to be volatile as
a result of a number of factors, including, but not limited to the following:
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developments or the absence of developments in obtaining
a contract from SASSA;
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fluctuations in currency exchange rates,
particularly the US dollar/ZAR exchange rate;
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quarterly variations in our operating results, especially
if our operating results fall below the expectations of securities
analysts and investors;
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announcements of acquisitions, disposals or impairments
of intangible assets;
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the timing of or delays in the commencement,
implementation or completion of major projects;
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large purchases or sales of our common stock;
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general conditions in the markets in which we operate;
and
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economic and financial conditions.
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Approximately
40% of our outstanding common stock is owned by two shareholders. The interests
of these shareholders may conflict with those of our other shareholders.
There
is a concentration of ownership of our outstanding common stock because
approximately 40% of our outstanding common stock is owned by two shareholders.
Based on its most recent SEC filing disclosing its ownership of our shares,
International Value Advisers, LLC, or IVA, beneficially owned 25.4% of our
outstanding common stock. In addition, investment entities affiliated with
General Atlantic LLC owned 14.2% of our outstanding common stock. General
Atlantic also has representation on our board of directors. The interests of IVA
and General Atlantic may be different from or conflict with the interests of our
other shareholders. As a result of the ownership by IVA and General Atlantic, as
well as General Atlantics board seat, they will be able, if they act together,
to influence our management and affairs and all matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying or preventing a change of control of our company, thus depriving
shareholders of a premium for their shares, or facilitating a change of control
that other shareholders may oppose.
We
may seek to raise additional financing by issuing new securities with terms or
rights superior to those of our shares of common stock, which could adversely
affect the market price of our shares of common stock.
We
may require additional financing to fund future operations, including expansion
in current and new markets, programming development and acquisition, capital
costs and the costs of any necessary implementation of technological innovations
or alternative technologies, or to fund acquisitions. Because of the exposure to
market risks associated with economies in emerging markets, we may not be able
to obtain financing on favorable terms or at all. If we raise additional funds
by issuing equity securities, the percentage ownership of our current
shareholders will be reduced, and the holders of the new equity securities may
have rights superior to those of the holders of shares of common stock, which
could adversely affect the market price and voting power of shares of common
stock. If we raise additional funds by issuing debt securities, the holders of
these debt securities would similarly have some rights senior to those of the
holders of shares of common stock, and the terms of these debt securities could
impose restrictions on operations and create a significant interest expense for
us.
27
We
may have difficulty raising necessary capital to fund operations or acquisitions
as a result of market price volatility for our shares of common stock.
In
recent years, the securities markets in the United States have experienced a
high level of price and volume volatility, and the market price of securities of
many companies have experienced wide fluctuations that have not necessarily been
related to the operations, performance, underlying asset values or prospects of
such companies. For these reasons, our shares of common stock can also be
expected to be subject to volatility resulting from purely market forces over
which we will have no control. If our business development plans are successful,
we may require additional financing to continue to develop and exploit existing
and new technologies, to expand into new markets and to make acquisitions, all
of which may be dependent upon our ability to obtain financing through debt and
equity or other means.
Issuances
of significant amounts of stock in the future could potentially dilute your
equity ownership and adversely affect the price of our common stock.
We
believe that it is necessary to maintain a sufficient number of available
authorized shares of our common stock in order to provide us with the
flexibility to issue shares for business purposes that may arise from time to
time. For example, we could sell additional shares to raise capital to fund our
operations or to acquire other businesses, issue additional shares under our
stock incentive plan or declare a stock dividend. Our board may authorize the
issuance of additional shares of common stock without notice to, or further
action by, our shareholders, unless shareholder approval is required by law or
the rules of the NASDAQ Stock Market. The issuance of additional shares could
dilute the equity ownership of our current shareholders. In addition, additional
shares that we issue would likely be freely tradable which could adversely
affect the trading price of our common stock.
Failure
to maintain effective internal control over financial reporting in accordance
with Section 404 of the Sarbanes-Oxley Act, especially over companies that we
may acquire, could have a material adverse effect on our business and stock
price. Our management evaluation and auditor attestation regarding the
effectiveness of our internal control over financial reporting as of June 30,
2011, excluded the operations of KSNET. If we are not able to integrate KSNETs
operations into our internal control over financial reporting, our internal
control over financial reporting may not be effective.
Under
Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes, we are required to
furnish a management certification and auditor attestation regarding the
effectiveness of our internal control over financial reporting. We are required
to report, among other things, control deficiencies that constitute a material
weakness or changes in internal control that materially affect, or are
reasonably likely to materially affect, internal control over financial
reporting. A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of annual or interim
financial statements will not be prevented or detected on a timely basis.
The
requirement to evaluate and report on our internal controls also applies to
companies that we acquire. As a private company, KSNET was not required to
comply with Sarbanes prior to the time we acquired it. The integration of KSNET
into our internal control over financial reporting has required significant time
and resources from our management and other personnel and may increase our
compliance costs. Our management evaluation and auditor attestation regarding
the effectiveness of our internal control over financial reporting as of June
30, 2011, excluded the operations of KSNET. If we fail to successfully integrate
these operations into our internal control over financial reporting, our
internal control over financial reporting may not be effective.
While
we continue to dedicate resources and management time to ensuring that we have
effective controls over financial reporting, including with respect to KSNETs
operations, failure to achieve and maintain an effective internal control
environment could have a material adverse effect on the markets perception of
our business and our stock price.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions based upon U.S. laws, including
the federal securities laws or other foreign laws, against us or our directors
and officers and experts.
While
Net1 is incorporated in the state of Florida, United States, the company is
headquartered in Johannesburg, South Africa and substantially all of the
companys assets are located outside the United States.
28
In
addition, the majority of Net1s directors and officers reside outside of the
United States and our experts, including our independent registered public
accountants, are based in South Africa. As a result, even though you could
effect service of legal process upon Net1, as a Florida corporation, in the
United States, you may not be able to collect any judgment obtained against Net1
in the United States, including any judgment based on the civil liability
provisions of the U.S. federal securities laws, because substantially all of our
assets are located outside the United States. Moreover, it may not be possible
for you to effect service of legal process upon the majority of our directors
and officers or upon our experts within the United States or elsewhere outside
South Africa and any judgment obtained against any of our foreign directors,
officers and experts in the United States, including one based on the civil
liability provisions of the U.S. federal securities laws, may not be collectible
in the United States and may not be enforced by a South African court. A foreign
judgment is not directly enforceable in South Africa, but constitutes a cause of
action which will be enforced by South African courts provided that:
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the court or arbitral body which pronounced the judgment had international
jurisdiction and competence to entertain the case according to the principles
recognized by South African law with reference to the jurisdiction of foreign
courts;
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the judgment is final and conclusive (that is, it cannot be altered by the
court which pronounced it);
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the judgment has not lapsed;
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the recognition and enforcement of the judgment by South African courts
would not be contrary to public policy in South Africa, including observance
of the rules of natural justice which require that no award is enforceable
unless the defendant was duly served with documents initiating proceedings,
that he was given a fair opportunity to be heard and that he enjoyed the right
to be legally represented in a free and fair trial before an impartial
tribunal;
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the judgment was not obtained by improper or fraudulent means;
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the judgment does not involve the enforcement of a penal or foreign
revenue law or any award of multiple or punitive damages; and
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the enforcement of the judgment is not otherwise precluded by the
provisions of the Protection of Business Act 99 of 1978 (as amended), of the
Republic of South Africa.
It
has been the policy of South African courts to award compensation for the loss
or damage actually sustained by the person to whom the compensation is awarded.
South African courts have awarded compensation to shareholders who have suffered
damages as a result of a diminution in the value of their shares based on
various actions by the corporation and its management. Although the award of
punitive damages is generally unknown to the South African legal system, that
does not mean that such awards are necessarily contrary to public policy.
Whether a judgment was contrary to public policy depends on the facts of each
case. Exorbitant, unconscionable, or excessive awards will generally be contrary
to public policy. South African courts cannot enter into the merits of a foreign
judgment and cannot act as a court of appeal or review over the foreign court.
Further, if a foreign judgment is enforced by a South African court, it will be
payable in South African currency. Also, under South Africas exchange control
laws, the approval of SARB is required before a defendant resident in South
Africa may pay money to a nonresident plaintiff in satisfaction of a foreign
judgment enforced by a court in South Africa.
It
is doubtful whether an original action based on United States federal securities
laws may be brought before South African courts. A plaintiff who is not resident
in South Africa may be required to provide security for costs in the event of
proceedings being initiated in South Africa. Furthermore, the Rules of the High
Court of South Africa require that documents executed outside South Africa must
be authenticated for the purpose of use in South African courts.
In
reaching the foregoing conclusions, we consulted with our South African legal
counsel, Cliffe Dekker Hofmeyr Inc.
We
may become subject to a US tax liability for failing to withhold on certain
distributions on instruments issued in connection with the Aplitec transaction.
There
is no statutory, judicial or administrative authority that directly addresses
the tax treatment of non-US holders that elected to receive units in a trust
representing beneficial interests in one of our subsidiaries in connection with
our 2004 acquisition of Aplitec. We believe these interests should be treated
for United States federal income tax purposes as, and we did treat them as,
separate and distinct interests in the subsidiary. As such, we and our
affiliates did not withhold any amounts for US federal taxes in respect of any
distributions paid on such interests. There is a risk, however, that these
interests, together with the special convertible preferred stock, may be treated
as representing a single direct equity interest in us for US federal income tax
purposes. In such case, distributions received with respect to the interests in
the subsidiary could be subject to US federal withholding tax, and we could be
liable for failure to withhold such taxes in our capacity as withholding agent.
In addition, our failure to collect and remit US federal withholding tax may
also subject us to penalties.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
29
ITEM 2. PROPERTIES
We
lease our corporate headquarters facility which consists of 84,193 square feet
in Johannesburg, South Africa. We also lease properties throughout South Africa,
a 12,088 square foot manufacturing facility in Lazer Park, a 14,230 square foot
manufacturing facility in Brakpan and 73 depot facilities. We also lease
additional office space in Johannesburg, Pretoria, Cape Town and Durban, South
Africa; Vienna, Austria; Seoul, Republic of Korea; Moscow, Russia; New York, New
York; Dallas, Texas; Fredrick, Maryland; and New Delhi, India. These leases
expire at various dates through the year 2011 and 2014, respectively.
We
own land and buildings in Ahnsung,Kyung-gi, Republic of Korea, which facility is
used for the storage of business documents. We believe we have adequate
facilities for our current business operations.
ITEM 3. LEGAL PROCEEDINGS
In
2009, we instituted a lawsuit against SASSA in the High Court, alleging that it
unlawfully moved beneficiaries to SAPO in violation of our contract and the
PFMA, seeking injunctive relief. In January 2010, the High Court ruled in our
favor and directed SASSA to discontinue the registration of any beneficiaries
with SAPO until a proper procurement process had been completed. SASSA appealed
the High Courts ruling to the South African Supreme Court of Appeal, which
overturned the High Courts judgment in March 2011. We applied for leave to
appeal to the South African Constitutional Court, which was denied in June 2011.
See also 1a. Risk Factors We were unsuccessful in our lawsuit against SASSA
challenging SASSAs right to contract with SAPO to provide banking or payment
services relating to social grant beneficiaries. If SASSA provides this business
to SAPO rather than to us, the revenue and operating income we derive from our
current SASSA contract could be substantially reduced, which could have a
material adverse effect on us.
We
also made application to the High Court for the review and setting aside of the
decision to withdraw the previous SASSA tender and we are currently responding
to SASSAs answering affidavit, where after the parties will apply for a hearing
date.
There
are no other material pending legal proceedings, other than ordinary routine
litigation incidental to our business, to which we are a party or of which any
of our property is the subject.
ITEM 4. RESERVED
30
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
Our
common stock is listed on The Nasdaq Global Select Market, or Nasdaq, in the
United States under the symbol UEPS and on the JSE in South Africa under the
symbol NT1. The Nasdaq is our principal market for the trading of our common
stock.
The
following table sets forth, for the periods indicated, the high and low sales
prices of our common stock as reported by Nasdaq.
Period
|
|
|
High
|
|
|
Low
|
|
Quarter ended September 30,
2009
|
|
$
|
22.47
|
|
$
|
12.36
|
|
Quarter ended December 31, 2009
|
|
$
|
21.77
|
|
$
|
17.11
|
|
Quarter ended March 31, 2010
|
|
$
|
20.22
|
|
$
|
16.50
|
|
Quarter ended June 30, 2010
|
|
$
|
18.50
|
|
$
|
13.14
|
|
Quarter ended September 30,
2010
|
|
$
|
15.04
|
|
$
|
10.72
|
|
Quarter ended December 31, 2010
|
|
$
|
12.97
|
|
$
|
10.35
|
|
Quarter ended March 31, 2011
|
|
$
|
12.31
|
|
$
|
8.24
|
|
Quarter ended June 30, 2011
|
|
$
|
8.92
|
|
$
|
7.29
|
|
Our
transfer agent in the United States is The Bank of New York Mellon, One Wall
Street, New York, New York, 10286. According to the records of our transfer
agent, as of August 11, 2011, there were 19 shareholders of record of our common
stock. A substantially greater number of holders of our common stock are street
name or beneficial holders, whose shares are held of record by banks, brokers,
and other financial institutions. Our transfer agent in South Africa is Link
Market Services South Africa (Pty) Ltd, 16th Floor, 11 Diagonal Street,
Johannesburg, 2001, South Africa.
Dividends
We
have not paid any dividends on our shares of common stock during our last two
fiscal years and presently intend to retain future earnings to finance the
expansion of the business. We do not anticipate paying any cash dividends in the
foreseeable future. The future dividend policy will depend on our earnings,
capital requirements, expansion plans, financial condition and other relevant
factors.
Issuer
Purchases of Equity Securities
The
table below presents information relating to purchases of our common stock
during the fourth quarter of fiscal 2011:
|
|
|
|
|
|
|
|
(c)
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
Total number
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
of shares
|
|
|
dollar value
|
|
|
|
|
|
|
|
|
|
purchased as
|
|
|
of shares that
|
|
|
|
|
|
|
(b)
|
|
|
part of
|
|
|
may yet be
|
|
|
|
(a)
|
|
|
Average price
|
|
|
publicly
|
|
|
purchased
|
|
|
|
Total number
|
|
|
paid per
|
|
|
announced
|
|
|
under the
|
|
|
|
of shares
|
|
|
share
|
|
|
plans or
|
|
|
plans or
|
|
Period
|
|
purchased
|
|
|
(US dollars)
|
|
|
programs
|
|
|
programs
(1)
|
|
April 2011
|
|
-
|
|
|
-
|
|
|
-
|
|
|
100,000,000
|
|
May 2011
|
|
111,842
|
|
|
8.17
|
|
|
111,842
|
|
|
99,086,062
|
|
June 2011
|
|
13,550
|
|
|
8.02
|
|
|
13,550
|
|
|
98,977,410
|
|
Total
|
|
125,392
|
|
|
|
|
|
125,392
|
|
|
|
|
(1)
On February 5, 2010, we announced that our Board of Directors had authorized the
repurchase of up to $50 million of our common stock from time to time in open
market transactions. On May 5, 2010, we announced that our Board of Directors
had increased this authorization to an aggregate of up to $100 million. The
authorization has no expiration date.
31
The
table below presents our common stock purchased during fiscal 2011 per quarter:
|
|
|
|
|
Average price
|
|
|
|
Total number
|
|
|
paid per
|
|
|
|
of shares
|
|
|
share
|
|
Period
|
|
purchased
|
|
|
(US dollars)
|
|
First
|
|
-
|
|
|
-
|
|
Second
|
|
-
|
|
|
-
|
|
Third
|
|
-
|
|
|
-
|
|
Fourth
|
|
125,392
|
|
|
8.16
|
|
Total
fiscal 2011
|
|
125,392
|
|
|
8.16
|
|
Share
performance graph
The
chart below compares the five-year cumulative return, assuming the reinvestment
of dividends, where applicable, on our common stock with that of the S&P 500
Index and the NASDAQ Industrial Index. This graph assumes $100 was invested on
June 30, 2006, in each of our common stock, the S&P 500 companies, and the
companies in the NASDAQ Industrial Index.
32
ITEM 6. SELECTED FINANCIAL DATA
The
following selected historical consolidated financial data should be read
together with Item 7Managements Discussion and Analysis of Financial
Condition and Results of Operations and Item 8Financial Statements and
Supplementary Data. The following selected historical financial data as of June
30, 2011 and 2010, and for the three years ended June 30, 2011 has been derived
from our consolidated financial statements included elsewhere in this Annual
Report on Form 10-K. The selected historical consolidated financial data
presented below as of June 30, 2009, 2008 and 2007 and for the years ended June
30, 2008 and 2007, have been derived from our consolidated financial statements,
which are not included herein. The selected historical financial data as of each
date and for each period presented are prepared in accordance with US GAAP.
These historical results are not necessarily indicative of results to be
expected in any future period.
Consolidated Statements of Operations Data
(in thousands, except per share data)
|
|
Year
Ended June 30
|
|
|
|
2011
(1)
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Revenue
|
$
|
343,420
|
|
$
|
280,364
|
|
$
|
246,822
|
|
$
|
254,056
|
|
$
|
223,968
|
|
Cost of goods sold, IT processing, servicing and support
|
|
109,858
|
|
|
72,973
|
|
|
70,091
|
|
|
67,486
|
|
|
54,417
|
|
Selling, general and administrative(2)
|
|
119,692
|
|
|
80,854
|
|
|
64,833
|
|
|
65,362
|
|
|
61,625
|
|
Depreciation and amortization
|
|
34,671
|
|
|
19,348
|
|
|
17,082
|
|
|
10,822
|
|
|
11,050
|
|
Profit on sale of microlending business
|
|
-
|
|
|
-
|
|
|
455
|
|
|
-
|
|
|
-
|
|
Impairment losses(3)
|
|
41,771
|
|
|
37,378
|
|
|
1,836
|
|
|
-
|
|
|
-
|
|
Operating income
|
|
37,428
|
|
|
69,811
|
|
|
93,435
|
|
|
110,386
|
|
|
96,876
|
|
Foreign exchange gain related to short-term investment(4)
|
|
-
|
|
|
-
|
|
|
26,657
|
|
|
-
|
|
|
-
|
|
Interest income (expense), net
|
|
(1,018
|
)
|
|
9,069
|
|
|
10,828
|
|
|
15,722
|
|
|
4,401
|
|
Income before income taxes
|
|
36,410
|
|
|
78,880
|
|
|
130,920
|
|
|
126,108
|
|
|
101,277
|
|
Income tax expense(5)
|
|
33,525
|
|
|
40,822
|
|
|
42,744
|
|
|
39,192
|
|
|
37,574
|
|
Income from continuing operations
|
|
2,647
|
|
|
38,990
|
|
|
86,601
|
|
|
86,695
|
|
|
63,679
|
|
Net income attributable to Net1
|
|
2,647
|
|
|
38,990
|
|
|
86,601
|
|
|
86,695
|
|
|
63,679
|
|
Income from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.06
|
|
$
|
0.84
|
|
$
|
1.53
|
|
$
|
1.50
|
|
$
|
1.12
|
|
Diluted
|
$
|
0.06
|
|
$
|
0.84
|
|
$
|
1.53
|
|
$
|
1.49
|
|
$
|
1.11
|
|
(1) KSNET was acquired effective November 1, 2010, and our reported results for fiscal 2011 include KSNET revenues of $68.4 million, earnings before interest, tax and amortization of $18.2 million and a net loss of $4.1 million, after acquisition-related intangible assets amortization, deferred taxes related to acquisition-related intangible asset amortization and interest related to financing obtained to partially fund the acquisition.
(2) Selling, general and administrative expense includes a charge of $1.7
million (2011), $5.5 million (2010), $4.9 million (2009), $3.8 million (2008)
and $0.6 million (2007), respectively, in respect of stock-based
compensation.
(3) Customer relationships acquired in the acquisition of Net1
UTA were impaired in fiscal 2011. Goodwill related to the hardware, software and
related technology sales segment was impaired during fiscal 2010, and goodwill
related to the financial services segment was impaired during fiscal 2009.
(4) The foreign exchange gain related to a short-term investment in the form
of an asset swap arrangement which matured during fiscal 2009.
(5) The
fully-distributed tax rate for fiscal 2011, 2010 and 2009 was 34.55%, for fiscal
2008 it was 35.45% and for fiscal 2007 it was 36.89% . Our income tax expense
for fiscal 2011 includes valuation allowances created related to our Net1 UTA
business of $8.9 million and a reversal of $10.4 million related to the customer
impairment loss. Our income tax expense for fiscal 2009 and 2008 includes the
impact of the change in the fully-distributed rate during those fiscal years of
approximately $3.5 million and $5.4 million, respectively.
Additional Operating Data:
(in thousands, except percentages)
|
|
Year
ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Cash flows provided by operating activities
|
$
|
66,223
|
|
$
|
68,683
|
|
$
|
106,768
|
|
$
|
118,760
|
|
$
|
65,466
|
|
Cash flows used in investing activities
|
$
|
323,685
|
|
$
|
90,186
|
|
$
|
107,856
|
|
$
|
3,903
|
|
$
|
91,540
|
|
Cash flows provided by (used in) financing
activities .
|
$
|
183,269
|
|
$
|
(48,478
|
)
|
$
|
(40,248
|
)
|
$
|
2,864
|
|
$
|
3,225
|
|
Operating income margin
|
|
11%
|
|
|
25%
|
|
|
38%
|
|
|
43%
|
|
|
43%
|
|
33
Consolidated Balance Sheet Data:
(in thousands)
|
|
As
of June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Cash and cash equivalents
|
$
|
95,263
|
|
$
|
153,742
|
|
$
|
220,786
|
|
$
|
272,475
|
|
$
|
171,727
|
|
Total current assets before settlement assets
|
|
213,421
|
|
|
226,429
|
|
|
290,294
|
|
|
345,734
|
|
|
247,982
|
|
Goodwill (1)
|
|
209,570
|
|
|
76,346
|
|
|
116,197
|
|
|
76,938
|
|
|
85,871
|
|
Intangible assets (1)
|
|
119,856
|
|
|
68,347
|
|
|
75,890
|
|
|
22,216
|
|
|
31,609
|
|
Total assets
|
|
781,645
|
|
|
472,090
|
|
|
499,487
|
|
|
454,071
|
|
|
376,090
|
|
Total current liabilities before settlement obligations
|
|
104,396
|
|
|
57,927
|
|
|
77,809
|
|
|
76,503
|
|
|
54,698
|
|
Total long-term debt
|
|
111,776
|
|
|
4,343
|
|
|
4,185
|
|
|
3,766
|
|
|
4,100
|
|
Total Net1 equity
|
$
|
323,006
|
|
$
|
285,878
|
|
$
|
373,217
|
|
$
|
340,328
|
|
$
|
281,073
|
|
(1) Refer to note 9 to our consolidated financial statements for discussion of
the movement in our goodwill and intangible assets during fiscal 2011.
34
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with Item
6Selected Financial Data and Item 8Financial Statements and Supplementary
Data. In addition to historical consolidated financial information, the
following discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. See Item 1A Risk Factors and
Forward Looking Statements.
Overview
We
provide payment solutions and transaction processing services across a wide
range of industries and in various geographies.
We
have developed and market a smart-card based alternative payment system for the
unbanked and underbanked populations of developing economies. Our market-leading
system enables the estimated four billion people who generally have limited or
no access to a bank account to enter affordably into electronic transactions
with each other, government agencies, employers, merchants and other financial
service providers. Our UEPS uses biometrically secure smart cards that operate
in real-time but offline, unlike traditional payment systems offered by major
banking institutions that require immediate access through a communications
network to a centralized computer. This offline capability means that users of
our system can conduct transactions at any time with other card holders in even
the most remote areas so long as a smart card reader, which is often portable
and battery powered, is available. Our off-line systems also offer the highest
level of availability and affordability by removing any elements that are costly
and are prone to outages. In addition to effecting purchases, cash-backs and any
form of payment, our system can be used for banking, health care management,
international money transfers, voting and identification.
We
also develop and provide secure transaction technology solutions and services,
and offer transaction processing, financial and clinical risk management
solutions to various industries. Our core competencies around secure online
transaction processing, cryptography, mobile telephony and integrated circuit
card (chip/smart card) technologies are principally applied to electronic
commerce transactions in the telecommunications, banking, payroll, retail,
health care, petroleum and utility industries.
Our
technology is widely used in South Africa today, where we distribute pension and
welfare payments, using our UEPS technology, to over 3.2 million recipients in
five of South Africas nine provinces, process debit and credit card payment
transactions on behalf of retailers that we believe represent nearly 65% of
retailers within the formal retail sector in South Africa through our EasyPay
system, process value-added services such as bill payments and prepaid
electricity for the major bill issuers and local councils in South Africa and
provide mobile telephone top-up transactions for all of the South African mobile
carriers. We are the largest provider of third-party payroll payments in South
Africa through our FIHRST service that processes monthly payments for
approximately 1,250 employers representing over 850,000 employees. Our
MediKredit service provides the majority of funders and providers of healthcare
in South Africa with an on-line real-time management system for healthcare
transactions. We perform a similar service in the United States through our
XeoHealth subsidiary.
During
the second quarter of fiscal 2011, we acquired KSNET, for KRW 270 billion
(approximately $241 million). KSNET is the second largest transaction processor
by volume in Korea and offers card VAN, PG and banking VAN in that country. The
acquisition of KSNET expands our international footprint as well as diversifies
our revenue, earnings and product portfolio.
Sources of Revenue
We
generate our revenues by charging transaction fees to government agencies,
merchants, financial service providers, employers and healthcare providers; by
providing loans and insurance products and by selling hardware, licensing
software and providing related technology services.
We
have structured our business and our business development efforts around four
related but separate approaches to deploying our technology. In our most basic
approach, we act as a supplier, selling our equipment, software, and related
technology to a customer. As an example, in Ghana, we sold a complete UEPS to
the Central Bank, which owns and operates the resulting transaction settlement
system. The revenue and costs associated with this approach are reflected in our
hardware, software and related technology sales segment.
35
We
have found that we have greater revenue and profit opportunities, however, by
acting as a service provider instead of a supplier. In this approach we own and
operate the UEPS ourselves, charging one-time and on-going fees for the use of
the system either on a fixed or ad valorem basis. This is the case in South
Africa, where we distribute welfare grants on behalf of the South African
government and wages on behalf of employers on a fixed fee basis, but charge a
fee on an ad valorem basis for goods and services purchased using our smart
card. The revenue and costs associated with this approach are reflected in our
smart card accounts, South African transaction-based activities and financial
services segments. We have adopted a variation of this approach in Iraq, where
we operate a UEPS system on an outsourced basis on behalf of a consortium
consisting of the Iraqi government and local Iraqi banks, in return for
transaction fees based on the volume and value of transactions processed through
the system.
Because
our smart cards are designed to enable the delivery of more advanced services
and products, we are also willing to supply those services and products directly
where the business case is compelling. For instance, we provide short-term
UEPS-based loans to our smart card holders. This is an example of the third
approach that we have taken. Here we can act as the principal in operating a
business that can be better delivered through our UEPS. We can also act as an
agent, for instance, in the provision of insurance policies. In both cases, the
revenue and costs associated with this approach are reflected in our financial
services segment.
Through
KSNET, we earn most of our revenue from payment processing services we provide
to approximately 200,000 merchants and to card issuers in Korea through our
value-added network. In the US, we earn transaction fees from our customers who
utilize our VCPay technology to generate a unique, one-time use prepaid virtual
card number to securely purchase goods and services or perform bill payments in
any card not present environment. The revenue and costs at KSNET and VCPay, as
well as those from our Iraqi contract, are reflected in our international
transaction-based activities segment.
We
also generate fees from transaction processing for both funders and providers of
healthcare in South Africa and from providing a third party payroll payments
solution to South African companies. In both cases, the revenue and costs
associated with these services are reflected in our South African
transaction-based activities segment.
Finally,
we have entered into business partnerships or joint ventures to introduce our
UEPS and VTU solutions to new markets such as Botswana, Namibia, Nigeria and
Colombia. In these situations, we take an equity position in the business while
also acting as a supplier of technology. In evaluating these types of
opportunities, we seek to maintain a highly disciplined approach, carefully
selecting partners, participating closely in the development of the business
plan and remaining actively engaged in the management of the new business. In
most instances, the joint venture or partnership has a license to use the UEPS
in the specific territory, including the back-end system. We account for our
equity investments using the equity method. When we equity-account these
investments, we are required under US GAAP to eliminate our share of the net
income generated from sales of hardware and software to the investee. We
recognize this net income from these equity-accounted investments during the
period in which the hardware and software is utilized in the investees
operations, or has been sold to third-party customers, as the case may be.
We
believe that this flexible approach enables us to drive adoption of our solution
while capturing the value created by the implementation of our technology.
Business Developments during Fiscal 2011
South
Africa
SASSA
contract
Under
our SASSA contract, we provide our social welfare grants distribution service to
SASSA in five of South Africas nine provinces (KwaZulu-Natal, Limpopo, North
West, Northern Cape and Eastern Cape). The contract contains a standard pricing
formula for all provinces based on a transaction fee per beneficiary paid,
regardless of the number or amount of grants paid per beneficiary, calculated on
a guaranteed minimum number of beneficiaries per month.
We
signed our current agreement with SASSA on August 24, 2010 which was
retroactively effective to July 1, 2010. The contract was originally scheduled
to expire on March 31, 2011, was extended to September 30, 2011 and has been
further extended to March 31, 2012 on the same terms and conditions. In April
2011, SASSA publicly commenced a tender process for the award of new contracts.
We are participating in the tender process and have submitted our proposal.
See
Item 1ARisk Factors and Item 3Legal Proceedings for more information and
the risks associated with our SASSA contract, the recently initiated new tender
process and for an update on litigation between us and SASSA.
36
EasyPay
Kiosk pilot project
In
September 2010, we launched our EasyPay Kiosk, or EP Kiosk, pilot project at
select locations in the Gauteng province of South Africa. The EP Kiosk enables
users to purchase prepaid electricity and airtime and perform any post paid bill
payment service requirements using the interactive user-friendly touch screen
kiosk interface. The user will also be able to transfer prepaid voucher value to
other mobile phone users. Users can register their own prepaid voucher wallet on
the EP Kiosk, with access to the wallet guaranteed via biometric identification
of the user at time of registration. A five digit personal identification
number, or PIN, is also required by the user so as to facilitate transactions
done via their own mobile phones or via the website.
We
have already deployed several EP Kiosks and we expect to sign additional
agreements during fiscal 2012.
South
African transaction processors
During
fiscal 2011, our South African transaction processors were awarded various new
business contracts to perform transaction processing including for a top five
petroleum company, a medium-size retailer and four smaller-sized retailers,
as well as to perform distribution of prepaid electricity for two large metropolitan
areas. In addition, FIHRST continues to expand its client base and number and
value of transactions processed.
Outside
South Africa
Republic
of Korea
On
October 29, 2010, we acquired 98.73% of KSNET, a leading Republic of Korea
payment processor, for KRW 270 billion (approximately $240 million based on
October 29, 2010 exchange rates). Most of KSNETs revenue is derived from the
provision of payment processing services to approximately 200,000 merchants and
to card issuers in Korea through its VAN. KSNET has a diverse product offering
and we believe it is the only total payments solutions provider offering card
VAN, payment gateway and banking VAN services in Korea, which differentiates
KSNET from other Korean payment solution providers and allows it to cross-sell
its products across its customer base.
The
acquisition of KSNET expands our international footprint as well as diversifies
our revenue, earnings and product portfolio and provides an established base in
Asia for further business development activities in the region.
KSNETS
operating performance during fiscal 2011 has been largely in-line with our
expectations and the integration of KSNET has progressed well since the
acquisition closed at the end of October 2010. We have commenced a number of
strategic initiatives in the Republic of Korea to maintain our current market
share and to expand into adjacent markets. Specifically, we have embarked on a
number of medium-term initiatives which will be funded from our existing Korean
cash reserves. We do not expect to use funds generated by our other operations
to fund these initiatives in Korea. Our management teams are actively engaged in
identifying and evaluating opportunities in the Korean market place.
The
African Continent and Iraq
During
fiscal 2011, NUETS recorded revenue from transaction fees and the delivery of
UEPS-enabled smartcards under its contract with the government of Iraq. NUETS
expects to generate ongoing revenues from transaction fees under the Iraqi
contract during fiscal 2012. NUETS has entered the second phase of its
initiative in Ghana and now generates recurring income in the form of hardware
and software maintenance fees.
NUETS
continued to service its current customers on the African continent and in Iraq
and continued its business development efforts, including responding to a number
of tenders, in multiple new countries on the African continent during the year.
During
fiscal 2011, SmartSwitch Namibia generated incremental transaction fees from
transactions conducted between Namibian merchants and UEPS-enabled smartcards.
SmartSwitch Botswana generated transaction fees during fiscal 2011 from the
payment of food voucher grants. We expect SmartSwitch Namibia and Botswana to
continue generating transaction fees during fiscal 2012.
SmartSwitch
Namibia is no longer dependent on shareholder funding and commenced repayment of
its shareholder loans and interest during fiscal 2011. The shareholders of
SmartSwitch Botswana agreed to convert their loan funding to equity funding and
waive all interest due. The net effect of the reversal of the interest and
related foreign exchange effects are included in our results for fiscal 2011. We
sold our entire interest in VinaPay during fiscal 2011.
37
Net1
UTA
During
the third quarter of fiscal 2011, one of Net1 UTAs largest customers advised us
of its intention to transition to an alternative payment platform which will
negatively impact our revenue, net income and cash flow in the medium term. As a
consequence of this development, as well as deteriorating trading conditions and
uncertainty surrounding the timing and quantum of future net cash inflows, we
reviewed customer relationships acquired as part of the Net1 UTA acquisition for
impairment. As a result of this review, we recognized an impairment loss of
approximately $41.8 million related to the entire carrying value of customer
relationships acquired in the Net1 UTA acquisition in August 2008. In addition,
we reversed the deferred tax liability of $10.4 million associated with this
intangible asset.
The
impairment loss has been allocated to our hardware, software and related
technology sales operating segment.
In
late fiscal 2011, Net1 UTAs management prepared an updated forecast for the
remainder of calendar 2011 and for 2012 to determine the viability and
sustainability of its operations. Based on this forecast we believe that it will
take a number of years for Net1 UTA to return to profitability and that in the
short term it will require additional funding. The Net1 UTA management has
proposed and implemented a cost containment plan and operations in the CIS,
including employee headcount, have been substantially reduced. As a result of
the forecast provided, the anticipated short-term losses and the failure of Net1
UTA to generate revenues using its new transaction-based business model, we have
determined to provide a valuation allowance of approximately $8.9 million for
the full amount of deferred tax assets at Net1 UTA as of June 30, 2011.
In
July, 2011, Net1 UTA signed a contract with Banamex, a leading bank in Mexico
and part of Citigroup, for the delivery of VCpay. Banamex will offer VCpay to
its customers as an application that can be downloaded to a mobile phone and
linked to the customers credit and/or debit card accounts. VCpay allows
consumers to securely generate an offline, one-time use MVC number for a
specific limit or purchase amount on their mobile handsets to buy goods and
services or perform bill payments in any card not present environment.
Net1
Virtual Card
We
launched our VCPay
TM
offering in the United States during fiscal
2011. Our mobile phone-based virtual payment card application is designed to
eliminate fraud in CNP transactions. We have teamed up with MetroPCS
Communications, Inc., or MetroPCS, The Bancorp Bank, a wholly-owned subsidiary
of The Bancorp, Inc., FSV Payment Systems and MoneyGram International to offer a
comprehensive card issuing, processing and distribution network to wireless
subscribers in the United States.
MetroPCS
offers our VCPay
TM
to its prepaid customers as an application that is
pre-loaded on new Smartphones or can be downloaded on select existing devices.
VCPay
TM
allows a subscriber to generate a unique, one-time use
prepaid virtual card number to securely purchase goods and services or perform
bill payments in any CNP environment. We believe that the VCPay
TM
application is the first mobile phone-based prepaid program with no requirement
for the user to have a physical card or a bank account. Subscribers can load
their prepaid virtual accounts with cash at any of MoneyGram and Green Dots
100,000 U.S. agent locations, which are located in most communities including
many grocery, pharmacy and convenience store chains, or electronically via their
bank accounts or via direct deposit.
XeoHealth
During
fiscal 2011, XeoHealth intensified its marketing efforts in the United States of
its RTA solutions for the end-to-end electronic processing of medical claims
information. There has been significant interest from various participants in
the United States healthcare industry in the solutions offered by XeoHealth for
the current and newly mandated Health Insurance Portability and Accountability
Act, electronic data interchange transactions and we will expect to conclude our
first agreements for the provision of our technology during fiscal 2012.
New international transaction-based activities operating
segment
Effective
October 1, 2010, we have allocated our international transaction-based
activities to a new operating segment, namely international transaction-based
activities. This operating segment comprises the transaction processing
activities of KSNET, Net1 Virtual Card, and NUETS transaction processing
activities for its initiative in Iraq.
KSNET
currently contributes the majority of the revenue, operating income and net
income of this segment.
Segment
results for fiscal 2010 and 2009 have not been restated due to the insignificance
of the transaction processing activities of Net1 Virtual Card, and NUETS transaction
processing activities for its initiative in Iraq. However, for comparative purposes
in future periods, our reported results for fiscal 2011 include all legacy international
transaction-processing activities from July 1, 2010 and include KSNET from November
1, 2010.
38
Operating Segments
We
analyze our business and operations in terms of five inter-related but
independent operating segments: (1) South African transaction-based activities,
(2) international transaction-based activities (3) smart card accounts, (4)
financial services, and (5) hardware, software and related technology sales.
Corporate and corporate office activities as well as any inter-segment
eliminations are included in corporate/ eliminations. See Note 19 to our
consolidated financial statements for further information about our operating
segments.
South
African transaction-based activities
The
South African transaction-based activities operating segment consists primarily
of (1) our South African social welfare payments distribution operations which
we conduct through our subsidiary Cash Paymaster Services (Proprietary) Limited,
or CPS, and (2) our South African transaction processors, which consist of
EasyPay, MediKredit and FIHRST (collectively, transaction processors). CPS
utilizes the UEPS technology to administer and distribute social welfare grants
in five of South Africas nine provinces. Segment revenues include all fees that
we earn from SASSA and participating retail merchants from recurring UEPS
transactions that we process through our back-end system, such as the payment of
social welfare grants, debit orders, payment of wages, point of sale spending,
distribution of medicine, money transfers and prepayment of utility bills,
prepayment of mobile phone airtime and transaction fees from customers of our
transaction processors. The expenses associated with our social welfare payments
activities are primarily variable expenses such as security and guarding
expenses we incur to help insure the security of the cash we transport and the
safety of our employees who transport the cash, banking fees we incur when we
withdraw and redeposit cash, insurance and fixed expenses such as salaries and
property rental. The expenses associated with our transaction processors
operations are primarily variable expenses such as data communication and bank
charges for switching transactions and fixed expenses such as salaries,
depreciation of switch fixed assets and property rental.
International
transaction-based activities
The
international transaction-based activities operating segment consists primarily
of (1) KSNET, (2) Net1 Virtual Card, and (3) NUETS transaction processing
activities. Segment revenues include primarily transaction processing fees that
we earn from our activities in Korea, the US and Iraq. The expenses associated
with these activities are primarily variable expenses such as cash incentives to
agents and merchants and data communication charges and our fixed expenses
include primarily salaries, depreciation of switch fixed assets, insurance and
property rental.
We
expect to allocate the activities of XeoHealth to this operating segment in
fiscal 2012 if it achieves commercial viability. XeoHealth is expected to
generate fees from adjudication and process services and its margin profile is
expected to be similar to our other international transaction processors.
Smart
card accounts
Our
smart card accounts operating segment derives revenue from the provision of
smart card accounts to our card holders, which currently primarily consist of
social welfare grant beneficiaries. We provide a smart card account to all
social welfare beneficiaries to whom we distribute payments. A portion of the
fee we earn for the delivery of the service is for the provision of the smart
card account and is therefore included in the smart card accounts operating
segment. The fixed costs included in this operating segment are primarily
computer equipment-related and personnel costs associated with the operation of
the smart card accounts.
Financial
services
Our
financial services operating segment derives revenues from providing financial
services to card holders through our smart card delivery channel. These
financial services consist primarily of short-term loans and life insurance
products. We provide the loans ourselves and generate revenue from the service
fees charged on these loans. We sell life insurance products on behalf of
registered underwriters and earn revenue through the commissions we receive on
the sale of policies. The fees we earn for the collection of insurance policy
premiums through our debit order system is included in the South African
transaction-based activities operating segment. The fixed expenses associated
with the financial services operating segment consist primarily of costs of
administrative personnel and depreciation of computer equipment.
We
operated a traditional microlending business in South Africa which we sold
during the third quarter of fiscal 2009. The business extended short-term loans
for periods ranging from 30 days up to four months, with the majority of loans
being 30-day loans.
39
Hardware,
software and related technology sales
We
have developed a range of technological competencies to service our own internal
needs and to provide links with our client enterprises. We derive revenues from
the hardware, software and related technology sales operating segment by
providing to customers the hardware and software required to implement our UEPS
system. Typical components for a UEPS system installation are:
-
hardware for the back-end switching and settlement system;
-
customization of the UEPS software to suit local conditions, including
UEPS management system, ATM integration and POS device integration;
-
customization of an applications suite to clients specific requirements,
such as banking, retail or wage payments;
-
ongoing software and hardware support/maintenance; and
-
license fees.
Three
of our largest customers in this segment are the International Smart Card LLC,
of the Iraqi Consortium, the Central Bank of Ghana and Nedbank, one of South
Africas largest banks by asset size. In Ghana, we created a national payment
system in which all Ghanaian banks are required to participate. We have an
arrangement with Nedbank relating to the outsourcing of its entire POS device
management system, front-end switching Stratus computer platform, development of
their software systems, smart cards and POS device maintenance. We also supply
hardware to Nedbank in the form of POS devices and card readers on an ad hoc
basis.
Included
in our hardware, software and related technology sales segment are Net1 UTA,
Net1 UETS, cryptographic solutions, chip and GSM licensing, and POS solutions.
Net1 UTA is currently focusing on a transaction-based activities business model
and we expect to allocate revenues and expenses associated with this business to
our international transaction-based activities segment beginning in fiscal 2012.
Critical Accounting Policies
Our
consolidated financial statements have been prepared in accordance with US GAAP,
which requires management to make estimates and assumptions about future events
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities. As future events and their effects cannot be
determined with absolute certainty, the determination of estimates requires
managements judgment based on a variety of assumptions and other determinants
such as historical experience, current and expected market conditions and
certain scientific evaluation techniques. Management believes that the following
accounting policies are critical due to the degree of estimation required and
the impact of these policies on the understanding of the results of our
operations.
Deferred
Taxation
We
estimate our tax liability through the calculations done for the determination
of our current tax liability when tax returns are filed, together with assessing
temporary differences resulting from the different treatment of items for tax
and accounting purposes. These differences result in deferred tax assets and
liabilities which are disclosed on our balance sheet. Management then has to
assess the likelihood that deferred tax assets are more likely than not to be
realized in future periods. In the event it is determined that the deferred tax
assets to be realized in the future would be in excess of the net recorded
amount, an adjustment to the deferred tax asset valuation allowance would be
recorded. This adjustment would increase income, or additional paid in capital,
as appropriate, in the period such determination was made. Likewise, should it
be determined that all or part of the net deferred tax asset would not be
realized in the future, an adjustment to increase the deferred tax asset
valuation allowance would be charged to income in the period such determination
is made. In assessing the need for a valuation allowance, historical levels of
income, expectations and risks associated with estimates of future taxable
income and ongoing prudent and practicable tax planning strategies are
considered. During fiscal 2011, 2010, and 2009, we recorded increases to our
valuation allowance of $19.5 million, $5.0 million, and $16.5 million,
respectively.
40
Stock-based
Compensation
Management
is required to make estimates and assumptions related to our valuation and
recording of stock-based compensation charges under current accounting
standards. These standards require all share-based compensation to employees to
be recognized in the statement of operations based on their respective grant
date fair values over the requisite service periods and also requires an
estimation of forfeitures when calculating compensation expense. We utilize the
Cox Ross Rubinstein binomial model to measure the fair value of stock options
granted to employees and directors and recognize compensation cost on a straight
line basis. Option-pricing models require estimates of a number of key valuation
inputs including expected volatility, expected dividend yield, expected term and
risk-free interest rate. Our management has estimated forfeitures based on
historic employee behavior under similar compensation plans. No stock options
were granted during fiscal 2010. During fiscal 2009, our assumptions regarding
volatility changed significantly as a result of general economic conditions and
trading prices of our customers and suppliers. Accordingly, the fair value of
stock options is affected by the assumptions selected. Net stock-based
compensation expense from continuing operations was $1.7 million, $5.7 million
and $5.0 million for fiscal 2011, 2010 and 2009, respectively. Net stock-based
compensation expense for fiscal 2011, includes a reversal of $3.5 million
related to a portion of the restricted stock granted in August 2007 that did not
vest as the performance condition prescribed in the terms of the awards was not
met.
Intangible
Assets Acquired Through Acquisitions
The
fair values of the identifiable intangible assets acquired through acquisitions
were determined by management using the purchase method of accounting. We
completed acquisitions during fiscal 2011, 2010 and 2009, where we identified
and recognized intangible assets. We have used the relief from royalty method,
the multi-period excess earnings method, the income approach and the cost
approach to value acquisition-related intangible assets. In so doing, we made
assumptions regarding expected future revenues and expenses to develop the
underlying forecasts, applied contributory asset charges, discount rates,
exchange rates, cash tax charges and useful lives.
The
valuations were based on information available at the time of the acquisition
and the expectations and assumptions that have been deemed reasonable by us. No
assurance can be given, however, that the underlying assumptions or events
associated with such assets will occur as projected. For these reasons, among
others, the actual cash flows may vary from forecasts of future cash flows. To
the extent actual cash flows vary, revisions to the useful life or impairment of
intangible assets may be necessary. For instance, during fiscal 2011, we
recognized an impairment loss of approximately $41.8 million related to the
entire carrying value of customer relationships acquired in the Net1 UTA
acquisition in August 2008.
Business
Combinations and the Recoverability of Goodwill
A
component of our growth strategy has been to acquire and integrate businesses
that complement our existing operations. The purchase price of an acquired
business is allocated to the tangible and intangible assets acquired and
liabilities assumed based upon their estimated fair value at the date of
purchase. The difference between the purchase price and the fair value of the
net assets acquired is recorded as goodwill. In determining the fair value of
assets acquired and liabilities assumed in a business combination, we use
various recognized valuation methods, including present value modeling. Further,
we make assumptions using certain valuation techniques, including discount rates
and timing of future cash flows.
We
review the carrying value of goodwill annually or more frequently if
circumstances indicate impairment may have occurred. In performing this review,
we are required to estimate the fair value of goodwill that is implied from a
valuation of the reporting unit to which the goodwill has been allocated after
deducting the fair values of all the identifiable assets and liabilities that
form part of the reporting unit.
The
determination of the fair value of a reporting unit requires us to make
significant judgments and estimates. In determining the fair value of reporting
units, we consider the value of our business as a whole and allocate this value
across our reporting units based on the weighted average of the returns of the
reporting units.
We
base our estimates on assumptions we believe to be reasonable but that are
unpredictable and inherently uncertain. In addition, we make judgments and
assumptions in allocating assets and liabilities to each of our reporting
units.
The
results of our impairment tests during fiscal 2011 indicated that the fair value
of our reporting units exceeded their carrying values and therefore our
reporting units were not at risk of potential impairment. During the fourth
quarter of 2010 we determined that the carrying value of goodwill of the
hardware, software and related technology sales segment reporting unit exceeded
the fair value and, as a result, recorded an impairment loss of $37.4 million.
41
Accounts
Receivable and Provision for Doubtful Debts
We
maintain a provision for doubtful debts related to our hardware, software and
related technology sales and international transaction-based activities segments
as a result of sales or rental of hardware, support and maintenance services
provided; or sale of licenses to customers; or the provision of transaction
processing services to our customers. Our policy is to regularly review the
aging of outstanding amounts due from customers and adjust the provision based
on managements estimate of the recoverability of the amounts outstanding.
Management considers factors including period outstanding, creditworthiness of
the customers, past payment history and the results of discussions by our credit
department with the customer. We consider this policy to be appropriate taking
into account factors such as historical bad debts, current economic trends and
changes in our customer payment patterns. Additional provisions may be required
should the ability of our customers to make payments when due deteriorate in the
future. A significant amount of judgment is required to assess the ultimate
recoverability of these receivables, including on-going evaluation of the
creditworthiness of each customer.
Research and Development
Accounting
standards require product development costs to be charged to expenses as
incurred until technological feasibility is attained. Technological feasibility
is attained when our software has completed system testing and has been
determined viable for its intended use. The time between the attainment of
technological feasibility and completion of software development has been short.
Accordingly, we did not capitalize any development costs during the years ended
June 30, 2011, 2010 or 2009, particularly because the main part of our
development is the enhancement and upgrading of existing products.
Costs
to develop software for our internal use is expensed as incurred, except to the
extent that these costs are incurred during the application development stage.
All other costs including those incurred in the project development and
post-implementation stages are expensed as incurred.
A
significant amount of judgment is required to separate research costs, new
development costs and ongoing development costs based as the transition between
these stages. A multitude of factors need to be considered by management,
including an assessment of the state of readiness of the software and the
existence of markets for the software. The possibility of capitalizing
development costs in the future may have a material impact on the groups
profitability in the period when the costs are capitalized, and in subsequent
periods when the capitalized costs are amortized.
Recent
Accounting Pronouncements
Recent
accounting pronouncements adopted
Refer
to Note 2 of our consolidated financial statements for a full description of
recent accounting pronouncements, including the expected dates of adoption and
effects on financial condition, results of operations and cash flows.
Recent
accounting pronouncements not yet adopted as of June 30, 2011
Refer
to Note 2 of our consolidated financial statements for a full description of
recent accounting pronouncements not yet adopted as of June 30, 2011, including
the expected dates of adoption and effects on financial condition, results of
operations and cash flows.
Currency Exchange Rate Information
Actual
exchange rates
The
actual exchange rates for and at the end of the periods presented were as
follows:
Table 1
|
|
Year
ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
ZAR : $ average exchange rate
|
|
7.0286
|
|
|
7.6117
|
|
|
9.0484
|
|
Highest ZAR : $ rate during period
|
|
7.7809
|
|
|
8.3187
|
|
|
11.8506
|
|
Lowest ZAR : $ rate during period
|
|
6.4925
|
|
|
7.1731
|
|
|
7.1556
|
|
Rate at end of period
|
|
6.8449
|
|
|
7.6529
|
|
|
7.8821
|
|
42
Translation
exchange rates
We
are required to translate our results of operations from ZAR to US dollars on a
monthly basis. Thus, the average rates used to translate this data for the years
ended June 30, 2011, 2010 and 2009, vary slightly from the averages shown in the
table above. The translation rates we use in presenting our results of
operations are the rates shown in the following table:
|
|
|
|
|
Year ended
|
|
|
|
|
Table 2
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Income and expense items: $1
= ZAR
|
|
6.9962
|
|
|
7.6092
|
|
|
8.9397
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR
|
|
6.8449
|
|
|
7.6529
|
|
|
7.8821
|
|
Results of Operations
The
discussion of our consolidated overall results of operations is based on amounts
as reflected in our audited consolidated financial statements which are prepared
in accordance with US GAAP. We analyze our results of operations both in US
dollars, as presented in the consolidated financial statements, and
supplementally in ZAR, because ZAR is the functional currency of the entities
which contribute the majority of our profits and is the currency in which the
majority of our transactions are initially incurred and measured. Due to the
significant impact of currency fluctuations between the US dollar and ZAR on our
reported results and because we use the US dollar as our reporting currency, we
believe that the supplemental presentation of our results of operations in ZAR
is useful to investors to understand the changes in the underlying trends of our
business.
Fiscal
2011 results include MediKredit and FIHRST for the entire period and KSNET from
November 1, 2010. Fiscal 2010 results include MediKredit and FIHRST from January
1, 2010 and March 31, 2010, respectively, and do not include KSNET. Fiscal 2009
results do not include KSNET, MediKredit or FIHRST. In addition, on March 1,
2009, we sold our traditional microlending business and therefore, our fiscal
2009 results include revenue and operating loss from this business for the first
eight months of that year.
43
Fiscal
2011 Compared to Fiscal 2010
The
following factors had an influence on our results of operations during fiscal
2011 as compared with the same period in the prior year:
-
Impairment loss related to Net1 UTA customer relationships:
We recorded an impairment loss of $41.8 million related to Net1 UTAs
customer relationships;
-
SASSA price and volume reductions:
Our current contract with
SASSA has reduced our revenue and operating income as a result of price and
volume reductions from our previous contract;
-
Valuation allowances related to Net1 UTA deferred tax assets:
During fiscal 2011, we created valuation allowance totaling $8.9
million related to Net1 UTA deferred tax assets;
-
Favorable impact from the weakness of the US dollar:
The US
dollar depreciated by 8% compared to the ZAR during fiscal 2011 compared to
fiscal 2010 which has had a positive impact on our reported results;
-
Increased revenue from KSNET at lower operating margins, before
acquired intangible asset amortization, than our
legacy
business:
Our KSNET acquisition in October 2010 positively impacted
our revenue during fiscal 2011, however, because KSNET has an operating
margin, before acquired intangible asset amortization, that is lower than our
legacy businesses, it negatively impacted our operating margin. The inclusion
of KSNET in our results has also contributed to the increase in selling,
general and administration and depreciation and amortization expenses;
-
Increased transaction volumes at EasyPay:
Our reported
results were positively impacted by increased transaction volumes at EasyPay
resulting from growth in value-added services and higher than expected
activity at retailers during the Christmas season;
-
Increased revenue from MediKredit and FIRHST at lower operating
margins than other South African transaction-
based activity
business:
Our MediKredit and FIHRST acquisitions positively impacted
our revenue during fiscal 2011, however, because MediKredit generated an
operating loss and FIHRST has operating margin that is lower than our other
transaction-based activity businesses, they negatively impacted our operating
margin. The inclusion of these businesses in our results has also contributed
to the increase in selling, general and administration expense;
-
Increased user adoption in Iraq:
Our reported results were
positively impacted by increased transaction revenues at NUETS from the
adoption of our UEPS technology in Iraq;
-
Lower revenues and margins from hardware, software and related
technology sales segment:
Our hardware, software and related
technology sales segment was adversely impacted by lower revenues from all
contributors to this operating segment;
-
Intangible asset amortization related to acquisitions:
Our
reported results for fiscal 2011, were adversely impacted by additional
intangible asset amortization related to the acquisitions of KSNET, MediKredit
and FIHRST;
-
Lower interest income and increased interest expense resulting from
KSNET acquisition:
Our reported results were adversely impacted by
lower interest income due to the payment of a portion of the KSNET purchase
price in cash and increased interest expense due to the payment of a portion
of the KSNET purchase price utilizing long-term debt and facility fees of
approximately $2.0 million;
-
Reversal of stock-based compensation charges:
Our reported
results were positively impacted by the reversal of stock-based compensation
charge of $3.5 million (ZAR 24.5 million), primarily as a result of the
forfeitures of a portion of the performance-based restricted stock granted in
August 2007; and
-
Transaction-related expenses included in selling, general and
administration expense:
During fiscal 2011, we incurred
transaction-related expenses of $6.0 million, primarily for the acquisition of
KSNET.
44
Consolidated
overall results of operations
This
discussion is based on the amounts which were prepared in accordance with US
GAAP.
The
following tables show the changes in the items comprising our statements of
operations, both in US dollars and in ZAR:
|
|
In United States Dollars
|
|
Table 3
|
|
(US
GAAP)
|
|
|
|
Year
ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
%
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
343,420
|
|
|
280,364
|
|
|
22%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
109,858
|
|
|
72,973
|
|
|
51%
|
|
Selling, general and administration
|
|
119,692
|
|
|
80,854
|
|
|
48%
|
|
Operating income before depreciation, amortization and impairment
loss
|
|
113,870
|
|
|
126,537
|
|
|
(10)%
|
|
Depreciation and amortization
|
|
34,671
|
|
|
19,348
|
|
|
79%
|
|
Impairment loss
|
|
41,771
|
|
|
37,378
|
|
|
12%
|
|
Operating income
|
|
37,428
|
|
|
69,811
|
|
|
(46)%
|
|
Interest (expense) income, net
|
|
(1,018
|
)
|
|
9,069
|
|
|
(111)%
|
|
Income before income taxes
|
|
36,410
|
|
|
78,880
|
|
|
(54)%
|
|
Income tax expense
|
|
33,525
|
|
|
40,822
|
|
|
(18)%
|
|
Net income before earnings (loss) from equity-accounted
investments
|
|
2,885
|
|
|
38,058
|
|
|
(92)%
|
|
(Loss) Earnings from equity-accounted investments
|
|
(339
|
)
|
|
93
|
|
|
(465)%
|
|
Net income
|
|
2,546
|
|
|
38,151
|
|
|
(93)%
|
|
Add: net loss attributable to non-controlling interest
|
|
(101
|
)
|
|
(839
|
)
|
|
(88)%
|
|
Net income attributable to us
|
|
2,647
|
|
|
38,990
|
|
|
(93)%
|
|
|
|
In South African Rand
|
|
Table 4
|
|
(US
GAAP)
|
|
|
|
Year
ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
%
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
2,402,634
|
|
|
2,133,374
|
|
|
13%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
768,589
|
|
|
555,274
|
|
|
38%
|
|
Selling, general and administration
|
|
837,389
|
|
|
615,243
|
|
|
36%
|
|
Operating income before depreciation, amortization and impairment
loss
|
|
796,656
|
|
|
962,857
|
|
|
(17)%
|
|
Depreciation and amortization
|
|
242,565
|
|
|
147,225
|
|
|
65%
|
|
Impairment loss
|
|
292,238
|
|
|
284,420
|
|
|
3%
|
|
Operating income
|
|
261,853
|
|
|
531,212
|
|
|
(51)%
|
|
Interest (expense) income, net
|
|
(7,122
|
)
|
|
69,009
|
|
|
(110)%
|
|
Income before income taxes
|
|
254,731
|
|
|
600,221
|
|
|
(58)%
|
|
Income tax expense
|
|
234,548
|
|
|
310,627
|
|
|
(24)%
|
|
Net income before earnings (loss) from equity-accounted
investments
|
|
20,183
|
|
|
289,594
|
|
|
(93)%
|
|
(Loss) Earnings from equity-accounted investments
|
|
(2,372
|
)
|
|
708
|
|
|
(435)%
|
|
Net income
|
|
17,811
|
|
|
290,302
|
|
|
(94)%
|
|
Add: net loss attributable to non-controlling interest
|
|
(707
|
)
|
|
(6,384
|
)
|
|
(89)%
|
|
Net income attributable to us
|
|
18,518
|
|
|
296,686
|
|
|
(94)%
|
|
Analyzed
in ZAR, the increase in revenue and cost of goods sold, IT processing, servicing
and support for fiscal 2011 was primarily due to the inclusion of KSNET, FIHRST
and MediKredit, an increase in the number of UEPS-based loans made and increased
transaction volumes at EasyPay. This increase was partially offset by lower
revenues from our SASSA contract, and fewer sales from our hardware, software
and related technology sales segment.
Included
in fiscal 2011 selling, general and administration expense are
transaction-related costs of $6.0 million (ZAR 42.3 million), primarily related
to the KSNET acquisition. The increase in selling, general and administration
expense was offset by a reversal of stock-based compensation charge of $3.5
million (ZAR 24.5 million), primarily as a result of forfeitures (based on
failure to achieve the required vesting conditions) of a portion of
performance-based restricted stock granted in August 2007. The net fiscal 2011
stock-based compensation charge was $1.7 million (ZAR 12.0 million), which is
significantly lower than the fiscal 2010 charge of $5.7 million (ZAR 43.1
million). Fiscal 2010 selling, general and administration expenses include
acquisition-related costs of $0.6 million (ZAR 4.7 million).
45
Our
operating income margin decreased to 11% from 25% resulting primarily from the
impairment of intangibles, as well as from the price and volumes reductions
under our SASSA contract. We discuss the components of the operating income
margin in more detail under Results of operations by operating segment.
Our
direct costs of maintaining a listing on Nasdaq and the JSE, as well as
compliance with the Sarbanes-Oxley Act of 2002, or Sarbanes, particularly
Section 404 of Sarbanes, primarily includes independent directors fees, legal
fees, fees paid to Nasdaq and the JSE, investor relations expenses, our
compliance officers salary, fees paid to consultants who assist with Sarbanes
compliance and fees paid to our independent accountants related to the audit and
review process. This has resulted in expenditures of $3.2 million (ZAR 22.7
million) and $2.4 million (ZAR 17.9 million) during fiscal 2011 and 2010,
respectively.
In
ZAR, depreciation and amortization increased during fiscal 2011 primarily as a
result of intangible asset amortization related to the KSNET, MediKredit and
FIHRST acquisitions. The intangible asset amortization related to our various
acquisitions has been allocated to our operating segments as presented in the
tables below:
Table 5
|
|
Year
ended June 30,
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
$ 000
|
|
|
|
$ 000
|
|
Amortization included in depreciation and
amortization expense:
|
|
21,692
|
|
|
|
14,138
|
|
South African transaction-based activities
|
|
5,702
|
|
|
|
4,205
|
|
International transaction-based
activities
|
|
8,602
|
|
|
|
-
|
|
Hardware, software and related technology
sales
|
|
7,388
|
|
|
|
9,933
|
|
Table 6
|
|
Year
ended June 30,
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Amortization included in depreciation and
amortization expense:
|
|
151,761
|
|
|
|
107,588
|
|
South African transaction-based activities
|
|
39,891
|
|
|
|
31,999
|
|
International transaction-based
activities
|
|
60,181
|
|
|
|
-
|
|
Hardware, software and related technology
sales
|
|
51,689
|
|
|
|
75,589
|
|
During
fiscal 2011, customer relationships acquired as part of the Net1 UTA acquisition
in August 2008 were reviewed for impairment following deteriorating trading
conditions and uncertainty surrounding the timing and quantum of future net cash
inflows. As a consequence of this review, we have recognized an impairment loss
of approximately $41.8 million related to the entire carrying value of customer
relationships acquired. In addition, we have reversed the deferred tax liability
of $10.4 million associated with this intangible asset.
During
fiscal 2010, we recognized an impairment loss of approximately $37.4 million on
goodwill allocated to the hardware, software and related technology sales
segment as a result of deteriorating trading conditions of this segment,
particularly at Net1 UTA, and uncertainty surrounding contract finalization
dates which were expected to impact future cash flows.
Interest
on surplus cash for fiscal 2011 decreased to $7.7 million (ZAR 53.4 million)
from $10.1 million (ZAR 77.0 million) for fiscal 2010. The decrease resulted
primarily from lower average daily ZAR cash balances during fiscal 2011 as a
result of the payment of a portion of the KSNET purchase price in cash as well
as lower deposit rates resulting from the decrease in the South African prime
interest rate from an average of approximately 10.43% per annum for fiscal 2010
to 9.29% per annum for fiscal 2011.
Fiscal
2011 interest expense increased to $8.7 million (ZAR 60.5 million) from $1.0
million (ZAR 8.0 million) for fiscal 2010 due to the incurrence of long-term
debt to fund a portion of the KSNET purchase price. Interest expense includes
amortized debt facility fees of $2.0 million (ZAR 13.7 million).
Total
tax expense for fiscal 2011 decreased to $33.5 million (ZAR 234.5 million) from
$40.8 million (ZAR 310.6 million) in fiscal 2010. Deferred tax assets and
liabilities are measured utilizing the enacted fully-distributed tax rate.
Excluding the impact of reversal of the Net1 UTA customer relationships deferred
tax liability and the Net1 UTA valuation allowances, our total tax expense
decreased primarily due to lower taxable income resulting from the SASSA price
and volume reductions and a decrease in overall profitability. As discussed
above, our tax expense was reduced by the reversal of $10.4 million related to
deferred tax liabilities related to impaired Net1 UTA customer relationships.
Our tax expense increased due to valuation allowances of $8.9 million created
related to Net1 UTA deferred tax assets. Our effective tax rate for fiscal 2011
was 92.08%, compared to 51.8% for fiscal 2010. The change in our effective tax
rate was primarily due to an increase in non-deductible expenses, including
stock-based compensation charges, interest expenses related to our Korean debt
facilities and acquisition-related expenses, and the Net1 UTA valuation
allowance.
46
Net1
loss from equity-accounted investments for fiscal 2011 were $0.3 million (ZAR
2.4 million) compared with earnings of $0.1 million (ZAR 0.7 million) during
fiscal 2010. Net loss from equity-accounted investments for fiscal 2011 was
primarily due to waiver of interest and related currency effects at SmartSwitch
Botswana offset by an increase in transaction fees generated by SmartSwitch
Namibia and SmartSwitch Botswana. VTU Colombia and VinaPay incurred losses
during fiscal 2011 and 2010, respectively. VinaPay was sold in April 2011.
Results
of operations by operating segment
The
composition of revenue and the contributions of our business activities to
operating income are illustrated below.
Table 7
|
|
In
United States Dollars (US GAAP)
|
|
|
|
Year
ended June 30,
|
|
|
|
2011
|
|
|
|
% of
|
|
|
2010
|
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$000
|
|
|
|
total
|
|
|
$000
|
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based activities
|
|
188,590
|
|
|
|
55%
|
|
|
191,362
|
|
|
|
68%
|
|
|
(1)%
|
|
International transaction-based activities
|
|
69,947
|
|
|
|
20%
|
|
|
-
|
|
|
|
-
|
|
|
nm
|
|
Smart card accounts
|
|
33,315
|
|
|
|
10%
|
|
|
31,971
|
|
|
|
11%
|
|
|
4%
|
|
Financial services
|
|
7,313
|
|
|
|
2%
|
|
|
4,023
|
|
|
|
1%
|
|
|
82%
|
|
Hardware, software and related technology sales
|
|
44,255
|
|
|
|
13%
|
|
|
53,008
|
|
|
|
20%
|
|
|
(17)%
|
|
Total consolidated revenue
|
|
343,420
|
|
|
|
100%
|
|
|
280,364
|
|
|
|
100%
|
|
|
22%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based activities
|
|
74,642
|
|
|
|
199%
|
|
|
106,036
|
|
|
|
152%
|
|
|
(30)%
|
|
Operating income before amortization
|
|
80,344
|
|
|
|
|
|
|
110,241
|
|
|
|
|
|
|
(27)%
|
|
Amortization
|
|
(5,702
|
)
|
|
|
|
|
|
(4,205
|
)
|
|
|
|
|
|
36%
|
|
International transaction-based activities
|
|
1,707
|
|
|
|
5%
|
|
|
-
|
|
|
|
|
|
|
nm
|
|
Operating income before
amortization
|
|
10,309
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
nm
|
|
Amortization
|
|
(8,602
|
)
|
|
|
|
|
|
-
|
|
|
|
|
|
|
nm
|
|
Smart card accounts
|
|
15,140
|
|
|
|
40%
|
|
|
14,532
|
|
|
|
21%
|
|
|
4%
|
|
Financial services
|
|
5,658
|
|
|
|
15%
|
|
|
2,881
|
|
|
|
4%
|
|
|
96%
|
|
Hardware, software and related technology sales
|
|
(49,930
|
)
|
|
|
(133)%
|
|
|
(42,524
|
)
|
|
|
(61)%
|
|
|
17%
|
|
Operating income before amortization
and
impairment of intangibles
|
|
(771
|
)
|
|
|
|
|
|
4,787
|
|
|
|
|
|
|
(116)%
|
|
Amortization and impairment
of intangibles
|
|
(49,159
|
)
|
|
|
|
|
|
(47,311
|
)
|
|
|
|
|
|
4%
|
|
Corporate/eliminations
|
|
(9,789
|
)
|
|
|
(26)%
|
|
|
(11,114
|
)
|
|
|
(16)%
|
|
|
(12)%
|
|
Total consolidated operating
income
|
|
37,428
|
|
|
|
100%
|
|
|
69,811
|
|
|
|
100%
|
|
|
(46)%
|
|
47
Table 8
|
|
In
South African Rand (US GAAP)
|
|
|
|
Year
ended June 30,
|
|
|
|
2011
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
|
% of
|
|
|
ZAR
|
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
|
total
|
|
|
000
|
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based activities
|
|
1,319,413
|
|
|
|
55%
|
|
|
1,456,131
|
|
|
|
68%
|
|
|
(9)%
|
|
International transaction-based activities
|
|
489,363
|
|
|
|
20%
|
|
|
|
|
|
|
|
|
|
nm
|
|
Smart card accounts
|
|
233,078
|
|
|
|
10%
|
|
|
243,277
|
|
|
|
11%
|
|
|
(4)%
|
|
Financial services
|
|
51,163
|
|
|
|
2%
|
|
|
30,612
|
|
|
|
1%
|
|
|
67%
|
|
Hardware, software and related technology sales
|
|
309,617
|
|
|
|
13%
|
|
|
403,354
|
|
|
|
20%
|
|
|
(23)%
|
|
Total consolidated
revenue
|
|
2,402,634
|
|
|
|
100%
|
|
|
2,133,374
|
|
|
|
100%
|
|
|
13%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based activities
|
|
522,210
|
|
|
|
199%
|
|
|
806,860
|
|
|
|
152%
|
|
|
(35)%
|
|
Operating income before amortization
|
|
562,101
|
|
|
|
|
|
|
838,859
|
|
|
|
|
|
|
(33)%
|
|
Amortization
|
|
(39,891
|
)
|
|
|
|
|
|
(31,999
|
)
|
|
|
|
|
|
25%
|
|
International transaction-based activities
|
|
11,943
|
|
|
|
5%
|
|
|
|
|
|
|
|
|
|
nm
|
|
Operating income before
amortization
|
|
72,124
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
nm
|
|
Amortization
|
|
(60,181
|
)
|
|
|
|
|
|
-
|
|
|
|
|
|
|
nm
|
|
Smart card accounts
|
|
105,922
|
|
|
|
40%
|
|
|
110,578
|
|
|
|
21%
|
|
|
(4)%
|
|
Financial services
|
|
39,584
|
|
|
|
15%
|
|
|
21,922
|
|
|
|
4%
|
|
|
81%
|
|
Hardware, software and related technology
sales
|
|
(349,320
|
)
|
|
|
(133)%
|
|
|
(323,578
|
)
|
|
|
(61)%
|
|
|
8%
|
|
Operating income before amortization
and
impairment of goodwill
|
|
(5,393
|
)
|
|
|
|
|
|
36,431
|
|
|
|
|
|
|
(115)%
|
|
Amortization and impairment
of goodwill
|
|
(343,927
|
)
|
|
|
|
|
|
(360,009
|
)
|
|
|
|
|
|
(4)%
|
|
Corporate/eliminations
|
|
(68,486
|
)
|
|
|
(21)%
|
|
|
(84,570
|
)
|
|
|
(16)%
|
|
|
(19)%
|
|
Total consolidated
operating income
|
|
261,853
|
|
|
|
100%
|
|
|
531,212
|
|
|
|
100%
|
|
|
(51)%
|
|
South
African transaction-based activities
In
ZAR, the decreases in revenue were primarily due to the new SASSA contract at
lower economics, which was partially offset by increased transaction volumes at
EasyPay and the inclusion of MediKredit and FIHRST.
Revenues
for South African transaction-based activities include the transaction fees we
earn through our merchant acquiring system and reflect the elimination of
inter-company transactions.
Operating
income margin of our South African transaction-based activities decreased to 40%
from 55% a year ago. The decrease was primarily due to the lower revenues
generated under our SASSA contract, additional intangible asset amortization
related to the acquisition of MediKredit and FIHRST and lower margins in our
recently-acquired transaction processing operations compared with legacy South
African transaction-based activities.
Pension
and welfare operations
:
Our
revenue and operating income related to our pension and welfare operations were
negatively impacted by our new contract discussed under Business Developments
during Fiscal 2011South AfricaSASSA contract. Our pension and welfare
operations continue to generate the majority of our revenues and operating
income in this operating segment and for us as a whole.
South
African transaction processors:
The
table below presents the total volume and value processed during fiscal 2011 and
2010 by our transaction processors:
Table 9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
Total
volume (000)
|
|
|
Total
value $ (000)
|
|
|
Total
value ZAR (000)
|
|
processor
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
EasyPay
|
|
707,622
|
|
|
655,176
|
|
|
23,574,378
|
|
|
18,904,176
|
|
|
164,931,066
|
|
|
143,847,549
|
|
MediKredit
|
|
9,805
|
|
|
5,411
|
|
|
513,503
|
|
|
227,881
|
|
|
3,592,572
|
|
|
1,734,015
|
|
FIHRST
|
|
21,954
|
|
|
5,260
|
|
|
9,792,178
|
|
|
1,858,590
|
|
|
68,508,034
|
|
|
14,142,572
|
|
48
Our
results for fiscal 2011 include intangible asset amortization related to our
MediKredit and FIHRST acquisitions but exclude RMTs intangible assets which
were fully amortized during fiscal 2010. Fiscal 2010 includes amortization
related to the RMT intangible assets for three quarters, MediKredit intangible
assets for two quarters and FIHRSTs intangible assets for one quarter.
Continued
adoption of our merchant acquiring system:
The
key statistics and indicators of our merchant acquiring system on a quarterly
basis during the last 18 months in each of the South African provinces where we
distribute social welfare grants are summarized in the table below.
The
increase in the number of POS devices since June 30, 2010, is due to increased
rental or purchase of POS devices by current merchants requesting additional
equipment and new merchants joining our UEPS merchant acquiring system. The
decrease in the number of participating UEPS retail locations is due to us
cancelling contracts due to non-payment by the merchants. Under our normal
credit control procedures we regularly scrutinize and review long outstanding
debtors accounts, and after all efforts have been exhausted, we cancel our
relationship with these defaulting merchants. The cancellation of these
contracts has not, and should not, have a significant impact on our results of
operations and as demonstrated by the key statistics below, we believe that our
merchant acquiring system is functioning optimally.
Table 10
|
|
Three
months ended
|
|
|
|
Mar 31,
|
|
|
Jun 30,
|
|
|
Sep 30,
|
|
|
Dec 31,
|
|
|
Mar 31,
|
|
|
Jun 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total POS devices installed as of period end
|
|
4,700
|
|
|
4,794
|
|
|
4,772
|
|
|
4,823
|
|
|
4,835
|
|
|
4,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of participating UEPS retail locations
as of period end
|
|
2,552
|
|
|
2,513
|
|
|
2,511
|
|
|
2,562
|
|
|
2,541
|
|
|
2,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of transactions processed through POS
devices during the quarter (1) (in $ 000)
|
|
397,141
|
|
|
388,277
|
|
|
399,637
|
|
|
393,691
|
|
|
411,233
|
|
|
446,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of transactions processed through POS
devices during the completed pay cycles for the quarter (2) (in $ 000)
|
|
381,993
|
|
|
402,294
|
|
|
395,479
|
|
|
394,924
|
|
|
401,723
|
|
|
444,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of transactions processed through POS
devices during the quarter (1) (in ZAR 000)
|
|
2,992,828
|
|
|
2,935,543
|
|
|
2,940,416
|
|
|
2,728,101
|
|
|
2,920,454
|
|
|
3,037,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of transactions processed through POS
devices during the completed pay cycles for the quarter (2) (in ZAR 000)
|
|
2,878,675
|
|
|
3,041,514
|
|
|
2,909,818
|
|
|
2,736,648
|
|
|
2,852,913
|
|
|
3,028,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of grants paid through POS devices
during the quarter (1)
|
|
4,370,553
|
|
|
4,618,013
|
|
|
4,819,458
|
|
|
4,580,255
|
|
|
4,804,540
|
|
|
4,850,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of grants paid through POS devices
during the completed pay cycles for the quarter (2)
|
|
4,699,620
|
|
|
4,741,737
|
|
|
4,710,596
|
|
|
4,599,893
|
|
|
4,739,062
|
|
|
4,839,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of grants processed per terminal
during the quarter (1)
|
|
933
|
|
|
973
|
|
|
1,008
|
|
|
955
|
|
|
995
|
|
|
994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of grants processed per terminal
during the completed pay cycles for the quarter (2)
|
|
1,003
|
|
|
999
|
|
|
985
|
|
|
959
|
|
|
981
|
|
|
992
|
|
(1) Refers to events occurring during
the quarter (i.e., based on three calendar months).
(2) Refers to events occurring during the completed pay cycle.
International
transaction-based activities
KSNET
currently contributes the majority of our revenues in this operating segment.
Operating margin for the segment is lower than our legacy South African
transaction-based businesses and was negatively impacted by start-up
expenditures related to our Virtual Card launch in the United States, but
partially offset by improving profitability of NUETS initiative in Iraq.
Operating income margin for fiscal 2011 was 2%.
Our
results for fiscal 2011 include the intangible asset amortization related to our
KSNET acquisition from November 1, 2010.
49
Smart
card accounts
Operating
income margin from providing smart card accounts was constant at 45% for each of
fiscal 2011 and 2010.
In
ZAR, revenue from the provision of smart card-based accounts increased in
proportion to the increased number of beneficiaries serviced through our SASSA
contract. A total number of 3,561,105 smart card-based accounts were active at
June 30, 2011, compared to 3,532,620 active accounts as at June 30, 2010.
Financial
services
Revenue
from UEPS-based lending increased primarily due to an increase in the number of
loans granted. Our current UEPS-based lending portfolio comprises loans made to
elderly pensioners in some of the provinces where we distribute social welfare
grants. We insure the UEPS-based lending book against default and thus no
allowance is required.
Operating
income margin for the financial services segment increased to 77% from 72%.
Hardware,
software and related technology sales
The
following table presents our revenue and operating income during fiscal 2011 and
2010:
Table 11
|
|
Year
ended June 30,
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
$000
|
|
|
|
$000
|
|
Revenue
|
|
44,255
|
|
|
|
53,008
|
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
33,790
|
|
|
|
40,707
|
|
Net1 UTA
|
|
10,465
|
|
|
|
12,301
|
|
|
|
|
|
|
|
|
|
Operating (loss) income before amortization
of intangible assets and impairment of intangibles
|
|
(771
|
)
|
|
|
4,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
(49,930
|
)
|
|
|
(42,524
|
)
|
Hardware, software and
related technology sales excluding Net1 UTA
|
|
1,147
|
|
|
|
6,332
|
|
Net1 UTA
|
|
(51,077
|
)
|
|
|
(48,856
|
)
|
Net1 UTA excluding impairment of intangibles and amortization of acquisition
related intangible assets
|
|
(2,570
|
)
|
|
|
(2,144
|
)
|
Impairment of intangibles
|
|
(41,771
|
)
|
|
|
(37,378
|
)
|
Amortization
of acquisition related intangible assets
|
|
(6,736
|
)
|
|
|
(9,334
|
)
|
Table 12
|
|
Year
ended June 30,
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Revenue
|
|
309,617
|
|
|
|
403,354
|
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
236,402
|
|
|
|
309,752
|
|
Net1 UTA
|
|
73,215
|
|
|
|
93,602
|
|
|
|
|
|
|
|
|
|
Operating (loss) income before amortization
of intangible assets and impairment of intangibles
|
|
(5,393
|
)
|
|
|
36,431
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
(349,320
|
)
|
|
|
(323,578
|
)
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
8,024
|
|
|
|
48,181
|
|
Net1 UTA
|
|
(357,344
|
)
|
|
|
(371,759
|
)
|
Net1 UTA excluding impairment of intangibles and amortization of acquisition
related intangible assets
|
|
(17,980
|
)
|
|
|
(16,314
|
)
|
Impairment
of intangibles
|
|
(292,238
|
)
|
|
|
(284,420
|
)
|
Amortization of acquisition
related intangible assets
|
|
(47,126
|
)
|
|
|
(71,025
|
)
|
In
ZAR, the decrease in revenue and operating income was primarily due to lower
revenues by all major contributors to this operating segment as a result of
challenging trading conditions. Net1 UTA has failed to retain and expand
hardware and software sales to its existing customer base and certain of our
South African businesses have been impacted by increased competition. UETS was
impacted by significantly lower hardware sales, primarily terminals and cards,
as these sales are generally made on an ad hoc basis. The majority of these
sales occur within the first two years after the commencement of a project, such
as in Ghana and Iraq.
50
Revenue
and operating income for fiscal 2011 comprised:
-
software development and customization, and sales of smart cards related to
our Ghana and Iraq contracts;
-
sales of licenses, smart cards and terminals to Net1 UTA clients , mainly
in Russia and Uzbekistan;
-
sales of SIM cards to customers;
-
sales of cryptographic solutions to customers;
-
rental of terminals to merchants participating in our merchant acquiring
system; and
-
repairs and maintenance services to customers.
During
fiscal 2011, customer relationships of $41.8 million acquired as part of the
Net1 UTA acquisition was impaired. During fiscal 2010, we recognized a goodwill
impairment loss of approximately $37.4 million (ZAR 284.4 million) as a result
of deteriorating trading conditions of this segment, particularly at Net1 UTA,
and uncertainty surrounding contract finalization dates which were expected to
impact future cash flows.
Amortization
of Prism intangible assets during fiscal 2011 and 2010, respectively, was
approximately $0.7 million (ZAR 4.6 million) and $0.6 million (ZAR 4.6 million)
and reduced our operating income.
As
we expand internationally, whether through traditional selling arrangements to
provide products and services (such as in Ghana and Iraq) or through joint
ventures (such as with SmartSwitch Namibia and SmartSwitch Botswana), we expect
to receive revenues from sales of hardware and from software customization and
licensing to establish the infrastructure of POS terminals and smart cards
necessary to enable utilization of the UEPS technology in a particular country.
To the extent that we enter into joint ventures and account for the investment
as an equity investment, we are required to eliminate our portion of the sale of
hardware, software and licenses to the investees. The sale of hardware, software
and licenses under these arrangements occur on an ad hoc basis as new
arrangements are established, which can materially affect our revenues and
operating income in this segment from period to period.
Corporate/
Eliminations
The
decrease in our corporate expenses resulted primarily from the reversal of
stock-based compensation charges of $3.5 million (ZAR 24.5 million), primarily
as a result of forfeitures (based on failure to achieve the required vesting
conditions) of performance-based restricted stock issued in August 2007. These
reductions were offset by higher corporate head office-related expenditure,
including the effects of inflation in South Africa, and transaction related
expenditures of $6.0 million (ZAR 42.3 million), primarily related to the
acquisition of KSNET.
Our
corporate expenses also includes expenditure related to compliance with
Sarbanes; non-executive directors fees; employee and executive salaries and
bonuses; stock-based compensation; legal and audit fees; directors and officers
insurance premiums; telecommunications expenses; property-related expenditures
including utilities, rental, security and maintenance; and elimination entries.
51
Fiscal
2010 Compared to Fiscal 2009
The
following factors had an influence on our results of operations during fiscal
2010 as compared with the same period in the prior year:
-
Favorable impact from the weakness of the US dollar:
The US
dollar depreciated by 15% compared to the ZAR during fiscal 2010 which has had
a positive impact on our reported results;
-
Increased transaction volumes at EasyPay:
Our reported
results were positively impacted by increased transaction volumes at EasyPay
resulting from growth in value-added services and higher than expected
activity at retailers during the Christmas season;
-
Increased user adoption in Iraq:
Our reported results were
favorably impacted by increased transaction revenues from the adoption of our
UEPS technology in Iraq;
-
Lower revenues and margins from hardware, software and related
technology sales segment:
Our hardware, software and related
technology sales segment was adversely impacted by fewer ad hoc sales to the
Bank of Ghana, lower revenues and overall margin generated by Net1 UTA and
weaker demand for our products as well as pricing pressures resulting from the
global recession in calendar 2009, all of which was partially offset by
hardware sales to Iraq;
-
Lower net interest income:
Our interest income, net, was
adversely impacted by lower average daily ZAR cash balance and a lower average
deposit rate during fiscal 2010 compared to fiscal 2009;
-
Lower intangible asset amortization:
In ZAR, our reported
results for fiscal 2010 were positively impacted by lower intangible asset
amortization as the majority of Prism and EasyPay acquisition-related
intangible assets were fully amortized in fiscal 2009;
-
Fiscal 2010 goodwill impairment losses:
During fiscal 2010,
we recognized a goodwill impairment loss of $37.4 million (ZAR 284.4 million);
and
-
Non-recurring fiscal 2009 items:
During fiscal 2009, we
recognized a foreign exchange gain of $26.7 million (ZAR 238.3 million)
resulting from an asset swap arrangement and recognized a profit on the sale
of our traditional microlending business of $0.5 million (ZAR 4.1 million).
Consolidated
overall results of operations
This
discussion is based on the amounts which were prepared in accordance with US
GAAP.
The
following tables show the changes in the items comprising our statements of
operations, both in US dollars and in ZAR:
|
|
In United States Dollars
|
|
Table 13
|
|
(US
GAAP)
|
|
|
|
Year
ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
%
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
280,364
|
|
|
246,822
|
|
|
14%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
72,973
|
|
|
70,091
|
|
|
4%
|
|
Selling, general and administration
|
|
80,854
|
|
|
64,833
|
|
|
25%
|
|
Operating income before depreciation, amortization and impairment
of goodwill
|
|
126,537
|
|
|
111,898
|
|
|
13%
|
|
Depreciation and amortization
|
|
19,348
|
|
|
17,082
|
|
|
13%
|
|
Profit on sale of microlending business
|
|
-
|
|
|
(455
|
)
|
|
nm
|
|
Impairment of goodwill
|
|
37,378
|
|
|
1,836
|
|
|
nm
|
|
Operating income
|
|
69,811
|
|
|
93,435
|
|
|
(25)%
|
|
Foreign exchange gain related to short-term
investment
|
|
-
|
|
|
26,657
|
|
|
nm
|
|
Interest income, net
|
|
9,069
|
|
|
10,828
|
|
|
(16)%
|
|
Income before income taxes
|
|
78,880
|
|
|
130,920
|
|
|
(40)%
|
|
Income tax expense
|
|
40,822
|
|
|
42,744
|
|
|
(5)%
|
|
Net income before earnings (loss) from equity-accounted
investments
|
|
38,058
|
|
|
88,176
|
|
|
(57)%
|
|
Earnings (Loss) from equity-accounted investments
|
|
93
|
|
|
(874
|
)
|
|
nm
|
|
Net income
|
|
38,151
|
|
|
87,302
|
|
|
(56)%
|
|
(Add) Less: net (loss) income attributable to non-controlling
interest
|
|
(839
|
)
|
|
701
|
|
|
nm
|
|
Net income attributable to us
|
|
38,990
|
|
|
86,601
|
|
|
(55)%
|
|
52
|
|
In South African Rand
|
|
Table 14
|
|
(US
GAAP)
|
|
|
|
Year
ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
%
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
2,133,374
|
|
|
2,206,512
|
|
|
(3)%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
555,274
|
|
|
626,592
|
|
|
(11)%
|
|
Selling, general and administration
|
|
615,243
|
|
|
579,587
|
|
|
6%
|
|
Operating income before depreciation, amortization and impairment
of goodwill
|
|
962,857
|
|
|
1,000,333
|
|
|
(4)%
|
|
Depreciation and amortization
|
|
147,225
|
|
|
152,708
|
|
|
(4)%
|
|
Profit on sale of microlending business
|
|
-
|
|
|
(4,068
|
)
|
|
nm
|
|
Impairment of goodwill
|
|
284,420
|
|
|
16,413
|
|
|
nm
|
|
Operating income
|
|
531,212
|
|
|
835,280
|
|
|
(36)%
|
|
Foreign exchange gain related to short-term
investment
|
|
-
|
|
|
238,306
|
|
|
nm
|
|
Interest income, net
|
|
69,009
|
|
|
96,799
|
|
|
(29)%
|
|
Income before income taxes
|
|
600,221
|
|
|
1,170,385
|
|
|
(49)%
|
|
Income tax expense
|
|
310,627
|
|
|
382,118
|
|
|
(19)%
|
|
Net income before earnings (loss) from equity-accounted
investments.
|
|
289,594
|
|
|
788,267
|
|
|
(63)%
|
|
Earnings (Loss) from equity-accounted investments
|
|
708
|
|
|
(7,813
|
)
|
|
nm
|
|
Net income
|
|
290,302
|
|
|
780,454
|
|
|
(63)%
|
|
(Add) Less: net (loss) income attributable to non-controlling
interest
|
|
(6,384
|
)
|
|
6,267
|
|
|
nm
|
|
Net income attributable to us
|
|
296,686
|
|
|
774,187
|
|
|
(62)%
|
|
Analyzed
in ZAR, the decrease in revenue and cost of goods sold, IT processing, servicing
and support for fiscal 2010 was primarily due to lower revenues in our hardware,
software and related technology sales segment. This decrease was offset by an
increase in South African transaction-based activities which resulted primarily
from increased volumes at EasyPay and the inclusion of MediKredit and FIHRST
operations for a portion of the year.
Our
operating income margin decreased to 25% from 38% resulting primarily from the
impairment of goodwill. The other contributors to operating income varied from
fiscal 2010 compared with fiscal 2009 as presented in tables 7 and 8 below.
Operating income contributions, based on operating margin, from our South
African transaction-based activities and smart card accounts segments were
comparable; however, our financial services segment contributed more and our
hardware, software and related technology sales segment contributed less during
fiscal 2010 compared with fiscal 2009. We discuss the components of the
operating income margin in more detail under Results of operations by
operating segment.
Analyzed in ZAR, selling, general
and administration expenses were higher in fiscal 2010 primarily due to
increases in goods and services purchased from third parties and the inclusion
of MediKredits and FIHRSTs operations. Fiscal 2010 selling, general and
administration expenses include acquisition-related costs of $0.6 million (ZAR
4.7 million) and the stock-based compensation charge related to stock options
awarded in May 2009 and restricted stock granted in August 2009.
Our
direct costs of maintaining a listing on Nasdaq and obtaining a listing on the
JSE, as well as compliance with the Sarbanes-Oxley Act of 2002, or Sarbanes,
particularly Section 404 of Sarbanes, includes independent directors fees,
legal fees, fees paid to Nasdaq and the JSE, our compliance officers salary,
fees paid to consultants who assist with Sarbanes compliance, fees paid to our
independent accountants related to the audit and review process and, during
fiscal 2009, fees paid to our consultants and advisors assisting with the JSE
listing. This has resulted in expenditures of $2.4 million (ZAR 17.9 million)
and $2.1 million (ZAR 18.7 million) during fiscal 2010 and 2009, respectively.
In
ZAR, depreciation and amortization decreased during fiscal 2010 primarily as a
result of lower Prism intangible asset amortization, offset by the intangible
asset amortization related to the Net1 UTA, RMT, MediKredit and FIHRST
acquisitions. The intangible asset amortization and deferred tax effects related
to our various acquisitions are summarized in the tables below:
Table 15
|
|
Year
ended June 30,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
$ 000
|
|
|
|
$ 000
|
|
Amortization included in depreciation and
amortization expense:
|
|
14,138
|
|
|
|
12,387
|
|
South African transaction-based activities
|
|
4,205
|
|
|
|
1,895
|
|
Hardware, software and
related technology
|
|
9,933
|
|
|
|
10,492
|
|
53
Table 16
|
|
Year
ended June 30,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Amortization included in depreciation and
amortization expense:
|
|
107,588
|
|
|
|
110,734
|
|
South African transaction-based activities
|
|
31,999
|
|
|
|
16,938
|
|
Hardware, software and
related technology
|
|
75,589
|
|
|
|
93,796
|
|
During
the fourth quarter of fiscal 2010, we recognized an impairment loss of
approximately $37.4 million on goodwill allocated to the hardware, software and
related technology sales segment as a result of deteriorating trading conditions
of this segment, particularly at Net1 UTA, and uncertainty surrounding contract
finalization dates which were expected to impact future cash flows. With regards
to the latter, through the end of the third quarter of fiscal 2010, we expected
to sign our first agreement that reflects the transformed business model for
Net1 UTA during the fourth quarter of fiscal 2010. However, it subsequently
became clear to us that this project had been delayed due to key executive
management changes at our target customer.
During
fiscal 2009, we sold our traditional microlending business and recognized a
profit of approximately $0.5 million (ZAR 4.1 million) and impaired goodwill of
$1.8 million (ZAR 16.4 million).
We
recognized a foreign exchange gain of $26.7 million (ZAR 238.3 million) during
fiscal 2009 resulting from an asset swap arrangement we entered into in August
2008.
Interest
on surplus cash for fiscal 2010 decreased to $10.1 million (ZAR 77.0 million)
from $20.3 million (ZAR 181.4 million) for fiscal 2009. The decrease in interest
on surplus cash held in South Africa was due to a lower average daily ZAR cash
balance during fiscal 2010 compared with fiscal 2009 and lower deposit rates
resulting from the adjustment in the South African prime interest rate from an
average of approximately 14.32% per annum for fiscal 2009 to 10.43% per annum
for fiscal 2010. The lower cash balances resulted primarily from our repurchase
of approximately 9.2 million of our shares from Brait S.As investment
affiliates in August 2009 for $124.5 million.
Included
in interest expense for fiscal 2009 is the facility fee of approximately $1.1
million (ZAR 9.7 million) that we paid to the lender under the short-term loan
facility we obtained to fund the Net1 UTA acquisition and approximately $0.8
million (ZAR 7.3 million) interest on the short-term loan facility. Excluding
the impact of this facility fee and the interest on the short-term loan
facility, interest expense decreased during fiscal 2010 due to a decrease in the
average rates of interest on our short-term facilities and the elimination of
our obligation to prefund social welfare grants under our SASSA contract. In
ZAR, excluding the impact of the facility fee, finance costs decreased to $1.0
million (ZAR 8.0 million) for fiscal 2010 from $7.6 million (ZAR 67.6 million)
for fiscal 2009.
Total
tax expense for fiscal 2010 was $40.8 million (ZAR 310.6 million) compared with
$42.7 million (ZAR 382.1 million) during the same period in the prior fiscal
year. Deferred tax assets and liabilities are measured utilizing the enacted
fully-distributed tax rate. Accordingly, a reduction in the fully-distributed
tax rate from 35.45% to 34.55% results in lower deferred tax assets and
liabilities and the net change of $3.5 million (ZAR 26.5 million) is included in
our income tax expense for fiscal 2009. Our total tax expense decreased
primarily due to the foreign exchange gain discussed above. Our effective tax
rate for fiscal 2010 was 51.8%, compared to 32.7% for fiscal 2009. The change in
our effective tax rate was primarily due to an increase in non-deductible
expenses, including the goodwill impairment described above, stock-based
compensation charges and non-deductible acquisition-related expenses during
fiscal 2010.
Earnings
from equity-accounted investments for fiscal 2010 were $0.1 million (ZAR 0.7
million) compared with a net loss of $0.9 million (ZAR 7.8 million) during
fiscal 2009. SmartSwitch Namibia generated net income during the year ended June
30, 2010, and we no longer account for the equity accounted losses in VTU
Colombia as the accumulated losses have exceeded our initial investments.
54
Results
of operations by operating segment
The
composition of revenue and the contributions of our business activities to
operating income are illustrated below.
Table 17
|
|
In
United States Dollars (US GAAP)
|
|
|
|
Year
ended June 30,
|
|
|
|
2010
|
|
|
|
% of
|
|
|
2009
|
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$ 000
|
|
|
|
total
|
|
|
$000
|
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based activities
|
|
191,362
|
|
|
|
68%
|
|
|
148,399
|
|
|
|
60%
|
|
|
29%
|
|
Smart card accounts
|
|
31,971
|
|
|
|
11%
|
|
|
29,576
|
|
|
|
12%
|
|
|
8%
|
|
Financial services
|
|
4,023
|
|
|
|
1%
|
|
|
5,430
|
|
|
|
2%
|
|
|
(26)%
|
|
Hardware, software and related technology sales
|
|
53,008
|
|
|
|
20%
|
|
|
63,417
|
|
|
|
26%
|
|
|
(16)%
|
|
Total consolidated revenue
|
|
280,364
|
|
|
|
100%
|
|
|
246,822
|
|
|
|
100%
|
|
|
14%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based activities
|
|
106,036
|
|
|
|
152%
|
|
|
83,509
|
|
|
|
89%
|
|
|
27%
|
|
Operating income before amortization
|
|
110,241
|
|
|
|
|
|
|
85,404
|
|
|
|
|
|
|
29%
|
|
Amortization
|
|
(4,205
|
)
|
|
|
|
|
|
(1,895
|
)
|
|
|
|
|
|
122%
|
|
Smart card accounts
|
|
14,532
|
|
|
|
21%
|
|
|
13,442
|
|
|
|
14%
|
|
|
8%
|
|
Financial services
|
|
2,881
|
|
|
|
4%
|
|
|
(34
|
)
|
|
|
-%
|
|
|
nm
|
|
Operating income before profit
on sale of
microlending business
and impairment of
goodwill
|
|
2,881
|
|
|
|
|
|
|
1,347
|
|
|
|
|
|
|
nm
|
|
Profit on sale
of microlending business and
impairment
of goodwill
|
|
-
|
|
|
|
|
|
|
(1,381
|
)
|
|
|
|
|
|
nm
|
|
Hardware, software and related technology sales
|
|
(42,524
|
)
|
|
|
(61)%
|
|
|
5,498
|
|
|
|
6%
|
|
|
nm
|
|
Operating income
before amortization and
impairment
of goodwill
|
|
4,787
|
|
|
|
|
|
|
15,990
|
|
|
|
|
|
|
(70)%
|
|
Amortization and impairment of goodwill
|
|
(47,311
|
)
|
|
|
|
|
|
(10,492
|
)
|
|
|
|
|
|
nm
|
|
Corporate/eliminations
|
|
(11,114
|
)
|
|
|
(16)%
|
|
|
(8,980
|
)
|
|
|
(9)%
|
|
|
24%
|
|
Total consolidated operating income
|
|
69,811
|
|
|
|
100%
|
|
|
93,435
|
|
|
|
100%
|
|
|
(25)%
|
|
Table 18
|
|
In
South African Rand (US GAAP)
|
|
|
|
Year
ended June 30,
|
|
|
|
2010
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
|
% of
|
|
|
ZAR
|
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
|
total
|
|
|
000
|
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based activities
|
|
1,456,131
|
|
|
|
68%
|
|
|
1,326,641
|
|
|
|
60%
|
|
|
10%
|
|
Smart card accounts
|
|
243,277
|
|
|
|
11%
|
|
|
264,400
|
|
|
|
12%
|
|
|
(8)%
|
|
Financial services
|
|
30,612
|
|
|
|
1%
|
|
|
48,543
|
|
|
|
2%
|
|
|
(37)%
|
|
Hardware, software and related technology sales
|
|
403,354
|
|
|
|
20%
|
|
|
566,928
|
|
|
|
26%
|
|
|
(29)%
|
|
Total consolidated revenue
|
|
2,133,374
|
|
|
|
100%
|
|
|
2,206,512
|
|
|
|
100%
|
|
|
(3)%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based activities
|
|
806,860
|
|
|
|
152%
|
|
|
746,545
|
|
|
|
89%
|
|
|
8%
|
|
Operating income before
amortization
|
|
838,859
|
|
|
|
|
|
|
763,483
|
|
|
|
|
|
|
10%
|
|
Amortization
|
|
(31,999
|
)
|
|
|
|
|
|
(16,938
|
)
|
|
|
|
|
|
89%
|
|
Smart card accounts
|
|
110,578
|
|
|
|
21%
|
|
|
120,167
|
|
|
|
14%
|
|
|
()%8
|
|
Financial services
|
|
21,922
|
|
|
|
4%
|
|
|
(304
|
)
|
|
|
-%
|
|
|
Nm
|
|
Operating income
before profit on sale of
microlending
business and impairment of
goodwill
|
|
21,922
|
|
|
|
|
|
|
12,041
|
|
|
|
|
|
|
Nm
|
|
Profit on sale of microlending
business
and impairment of goodwill
|
|
-
|
|
|
|
|
|
|
(12,345
|
)
|
|
|
|
|
|
Nm
|
|
Hardware, software and related technology sales
|
|
(323,578
|
)
|
|
|
(61)%
|
|
|
49,150
|
|
|
|
6%
|
|
|
Nm
|
|
Operating income before amortization
and
impairment of goodwill
|
|
36,431
|
|
|
|
|
|
|
142,946
|
|
|
|
|
|
|
(75)%
|
|
Amortization and impairment
of goodwill
|
|
(360,009
|
)
|
|
|
|
|
|
(93,796
|
)
|
|
|
|
|
|
Nm
|
|
Corporate/eliminations
|
|
(84,570
|
)
|
|
|
(16)%
|
|
|
(80,278
|
)
|
|
|
(9)%
|
|
|
5%
|
|
Total consolidated operating
income
|
|
531,212
|
|
|
|
100%
|
|
|
835,280
|
|
|
|
100%
|
|
|
(36)%
|
|
55
South
African transaction-based activities
In
ZAR, the increases in revenue were primarily due to our MediKredit and FIHRST
acquisitions and increased transaction volumes at EasyPay and Iraq. We discuss
these factors in more detail below.
Revenues
for South African transaction-based activities include the transaction fees we
earn through our merchant acquiring system and reflect the elimination of
inter-company transactions.
Segment
operating income margin decreased to 55% from 56%, mainly as a result of lower
margins from our MediKredit and FIHRST operations and at EasyPay as compared
with our pension and welfare operations. This decrease was partially offset by
cost management controls in our pension and welfare operations and increased
transaction fees from the utilization of our UEPS system in Iraq.
Pension
and welfare operations
:
Effective
April 1, 2009, we signed a one-year contract with SASSA which expired on March
31, 2010, and which was subsequently extended on its existing terms by three
months to June 30, 2010.
The
SASSA contract described above contained a standard pricing formula for all
provinces based on a transaction fee per beneficiary paid regardless of the
number or amount of grants paid per beneficiary, calculated on a guaranteed
minimum number of beneficiaries per month. Under our previous provincial
contracts, depending on the province, we received either a fee per grant
distributed, or per beneficiary paid, or as a percentage of the total grant
amount distributed. In addition, commencing with the May 2009 pay cycle, SASSA
assumed responsibility for the pre-funding of all social welfare grants. Our
average revenue per beneficiary paid therefore remains unchanged during the term
of the contract, including the current extension. From time to time, we are
requested to assist with the payment of ad-hoc special grants or benefits (such
as disaster relief payments), which may be at a different rate than the standard
welfare distribution price. We also receive a once-off registration fee for
every new beneficiary we enroll on our system.
Transaction
processors:
We
acquired MediKredit and FIHRST on January 1 and March 31, 2010, respectively,
and their operations are included in our results from those dates. MediKredits
results include claims processing support fees received from a customer it lost
in late calendar 2009 and which contractually continued to pay fees through the
end of April 2010. After intangible asset amortization MediKredit generated
nominal operating income and FIHRST generated a nominal operating loss, although
it was cash flow positive. During fiscal 2011, we expect that MediKredit will be
cash flow negative and that FIHRST will continue to be cash flow positive. These
cash flows are not expected to be significant to our operations during fiscal
2011.
The
table below presents the total volume and value processed during fiscal 2010 and
2009 by our transaction processors:
Table 19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
Total
volume
|
|
|
Total
value $ (000)
|
|
|
Total
value ZAR (000)
|
|
processor
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
EasyPay
|
|
655,175,671
|
|
|
580,738,580
|
|
|
18,904,176
|
|
|
14,671,863
|
|
|
143,847,549
|
|
|
131,161,910
|
|
MediKredit
|
|
5,410,984
|
|
|
-
|
|
|
227,881
|
|
|
-
|
|
|
1,734,015
|
|
|
-
|
|
FIHRST
|
|
5,259,808
|
|
|
-
|
|
|
1,858,590
|
|
|
-
|
|
|
14,142,572
|
|
|
-
|
|
Transaction
processing related to our Iraqi contract continued to grow sequentially through
fiscal 2010 and we expect this trend to continue into fiscal 2011.
Certain
EasyPay intangible assets were fully amortized at the end of fiscal 2009,
however, savings related to the reduction in amortization of EasyPay intangible
assets was offset by intangible asset amortization related to the MediKredit and
FIHRST acquisitions.
Continued
adoption of our merchant acquiring system:
Refer
to discussion under Fiscal 2011 compared to fiscal 2010Results of operations
by operating segmentSouth African transaction-based activitiesContinued
adoption of our merchant acquiring system.
56
Smart
card accounts
Operating
income margin from providing smart card accounts was constant at 45% for each of
the fiscal 2010 and 2009.
In
ZAR, revenue from the provision of smart card-based accounts decreased in
proportion to the lower number of beneficiaries serviced through our SASSA
contract. A total number of 3,532,620 smart card-based accounts were active at
June 30, 2010, compared to 3,875,463 active accounts as at June 30, 2009. The
decrease in the number of active accounts resulted largely from the suspension
and removal of invalid or fraudulent grants by SASSA.
Financial
services
Revenue
from UEPS-based lending increased primarily due to an increase in the number of
loans granted. In addition, on average, the return on these UEPS-based loans was
higher. Our current UEPS-based lending portfolio comprises loans made to elderly
pensioners in some of the provinces where we distribute social welfare grants.
We insure the UEPS-based lending book against default and thus no allowance is
required.
The
operating loss for fiscal 2009 includes a profit of $0.5 million (ZAR 4.1
million) on the sale of our traditional microlending business and goodwill
impairment of $1.8 million (ZAR 16.4 million).
Excluding
the effects of the goodwill impairment and profit on the sale of our traditional
microlending business, operating income margin for the financial services
segment increased to 72% from 25%.
Hardware,
software and related technology sales
Operating
results include Net1 UTA for fiscal 2010 and from September 1, 2008, for fiscal
2009. The following table presents our revenue and operating income during
fiscal 2010 and 2009:
Table 20
|
|
Year
ended June 30,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
$ 000
|
|
|
|
$ 000
|
|
Revenue
|
|
53,008
|
|
|
|
63,417
|
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
40,707
|
|
|
|
43,857
|
|
Net1 UTA
|
|
12,301
|
|
|
|
19,560
|
|
|
|
|
|
|
|
|
|
Operating income before amortization of intangible
assets and goodwill impairment
|
|
4,787
|
|
|
|
15,990
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
(42,524
|
)
|
|
|
5,498
|
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
6,332
|
|
|
|
8,474
|
|
Net1 UTA
|
|
(48,856
|
)
|
|
|
(2,976
|
)
|
Net1 UTA excluding impairment of goodwill and amortization of acquisition
related intangible assets
|
|
(2,144
|
)
|
|
|
4,508
|
|
Impairment
of goodwill
|
|
(37,378
|
)
|
|
|
-
|
|
Amortization of acquisition
related intangible assets
|
|
(9,334
|
)
|
|
|
(7,484
|
)
|
Table 21
|
|
Year
ended June 30,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Revenue
|
|
403,354
|
|
|
|
566,928
|
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
309,752
|
|
|
|
392,068
|
|
Net1 UTA
|
|
93,602
|
|
|
|
174,860
|
|
|
|
|
|
|
|
|
|
Operating income before amortization of intangible
assets and goodwill impairment
|
|
36,431
|
|
|
|
142,946
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
(323,578
|
)
|
|
|
49,150
|
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
48,181
|
|
|
|
75,755
|
|
Net1 UTA
|
|
(371,759
|
)
|
|
|
(26,605
|
)
|
Net1 UTA excluding impairment of goodwill and amortization of acquisition
related intangible assets
|
|
(16,314
|
)
|
|
|
40,300
|
|
Impairment
of goodwill
|
|
(284,420
|
)
|
|
|
-
|
|
Amortization of acquisition
related intangible assets
|
|
(71,025
|
)
|
|
|
(66,905
|
)
|
57
In
ZAR, the decrease in revenue was primarily due to lower revenues at Net1 UTA and
software development sales in 2009 under our Ghana contract that were not
repeated in 2010, which was offset marginally by increased hardware sales to
Iraq in 2010. In addition, our revenues in ZAR were negatively impacted by the
depreciation of the USD against the ZAR as sales to customers in Europe, Ghana
and Iraq are primarily denominated in USD. In ZAR, the decrease in operating
income was primarily due to amortization of Net1 UTA intangible assets,
impairment of goodwill and lower sales activity.
Revenue
and operating income for fiscal 2010 comprised:
-
software development and customization, sales of terminals and smart cards
related to our Ghana contract;
-
sales of licenses, smart cards and terminals to Net1 UTA clients , mainly
in Russia and Uzbekistan;
-
sales of SIM cards to customers;
-
sales of cryptographic solutions to customers;
-
rental of terminals to merchants participating in our merchant acquiring
system; and
-
repairs and maintenance services to customers.
Amortization
of Prism intangible assets during fiscal 2010 and 2009, respectively, was
approximately $0.6 million (ZAR 4.6 million) and $3.0 million (ZAR 26.9 million)
and reduced our operating income. During fiscal 2010, we recognized an
impairment loss of approximately $37.4 million (ZAR 284.4 million) as a result
of deteriorating trading conditions of this segment, particularly at Net1 UTA,
and uncertainty surrounding contract finalization dates which will impact future
cash flows.
Corporate/
Eliminations
The
increase in our losses resulted from increases in corporate head office-related
expenditure, including the effects of the increase in inflation in South Africa
and stock-based compensation charges.
Our
loss includes expenditure related to compliance with Sarbanes; non-executive
directors fees; employee and executive salaries and bonuses; stock-based
compensation; legal and audit fees; directors and officers insurance premiums;
telecommunications expenses; property-related expenditures including utilities,
rental, security and maintenance; and elimination entries.
Liquidity and Capital Resources
Our
business has historically generated and continues to generate high levels of
cash. At June 30, 2011, our cash balances were $95.3 million, which comprised
mainly ZAR-denominated balances of ZAR 493.2 million ($72.1 million),
KRW-denominated balances of KRW 13.6 billion ($12.6 million) and US
dollar-denominated balances of $9.9 million and other currency deposits,
primarily euro, of $0.7 million. The decrease in our cash balances from June 30,
2010, is primarily as a result of the payment of approximately $124.3 million to
fund a portion of the KSNET purchase price and the Secondary Taxation on
Companies, or STC, of $14.7 million incurred related to dividends paid from
South Africa to the United States in connection with the KSNET transaction. We
currently believe that our cash and credit facilities described below are
sufficient to fund our current operations for at least the next four quarters.
We
generally invest the surplus cash held by our South African operations in
overnight call accounts that we maintain at South African banking institutions,
and surplus cash held by our non-South African companies in the US and European
money markets. We have invested surplus cash in Korea in short-term investment
accounts at Korean banking institutions. In addition, we are required to invest
the interest payable under our Korean debt facilities due in the next six months
in an interest reserve account in Korea.
Historically,
we have financed most of our operations, research and development, working
capital, capital expenditures and acquisitions through our internally generated
cash. We take the following factors into account when considering whether to
borrow under our financing facilities:
We
have short-term credit facilities in South Africa of approximately ZAR 250
million ($36.5 million) which remained fully undrawn as of June 30, 2011.
58
As
of June 30, 2011, we had outstanding indebtedness of 130.5 billion KRW
(approximately $120.1 million based on June 30, 2011 exchange rates) under
credit facilities with a group of Korean banks (the Facilities Agreement). The
loans bear interest at the Korean CD rate in effect from time to time (3.00% as
of June 30, 2011) plus a margin of 4.10% . Semi-annual principal payments of
approximately $7.5 million (based on June 30, 2010 exchange rates) are due
commencing in October 2011, with final maturity scheduled for October 2015. The
loans are secured by substantially all of KSNETs assets, a pledge by our
subsidiary, Net1 Korea, of its entire equity interest in KSNET and a pledge by
the immediate parent of Net1 Korea (also one of our subsidiaries) of its entire
equity interest in Net1 Korea. The Facilities Agreement contains customary
covenants that require Net1 Korea and its consolidated subsidiaries to maintain
certain specified financial ratios (including a leverage ratio and a debt
service coverage ratio) and restrict their ability to make certain distributions
with respect to their capital stock, prepay other debt, encumber their assets,
incur additional indebtedness, make capital expenditures above specified levels,
engage in certain business combinations and engage in other corporate
activities. The loans under the Facilities Agreement are without recourse to,
and the covenants and other agreements contained therein do not apply to, us or
any of our subsidiaries (other than Net1 Korea and its subsidiaries, including
KSNET).
We
have a unique cash flow cycle due to the funding mechanism under our SASSA
contact and our pre-funding of certain merchants. Under our SASSA contract, we
receive the grant funds 48 hours prior to the provision of the service and any
interest we earn on these amounts is for the benefit of SASSA. We pre-fund
certain merchants for grants paid through our merchant acquiring system on our
behalf before the start of the payment service at pay points. We typically
reimburse merchants that are not pre-funded within 48 hours after they
distribute the grants to the social welfare beneficiaries.
In
addition, as a transaction processor, and in certain instances as a claims
adjudicator, we receive cash
from:
health care plans which we disburse to health
care service providers once we have adjudicated claims;
customers
on whose behalf we processes off payroll payments that we will disburse to
customer employees, payroll-related payees and other payees designated by the
customer; and
credit
card companies (as well as other types of payment services) which have business
relationships with merchants selling goods and services via the internet in
Korea which are our customers and on whose behalf we process the transactions
between various parties and settle the funds from the credit card companies to
our merchant customers.
These
funds do not represent cash that is available to us and we present these funds,
and the associated liability, outside of our current assets and liabilities on
our consolidated balance sheet. Movements in these cash balances are presented
in investing activities and movements in the obligations are presented in
financing activities in our consolidated statement of cash flows.
Cash
flows from operating activities
Cash
flows from operating activities for fiscal 2011 decreased to $66.2 million (ZAR
463.4 million) from $68.7 million (ZAR 522.1 million) for fiscal 2010. Our net
cash from operating activities decreased primarily due to the SASSA price and
volume reductions which were effective July 1, 2010. During fiscal 2011, we paid
interest under the Facilities Agreement of $4.1 million.
Cash
flows from operating activities for fiscal 2010 decreased to $68.7 million (ZAR
522.1 million) from $106.8 million (ZAR 954.5 million) for fiscal 2009, largely
due to the factors that contributed to decreases in revenues and operating
income in our hardware, software and related technology sales segments, offset
by increases in revenue and operating income in our transaction-based
activities.
During
fiscal 2011, we made a first provisional payment of $16.6 million (ZAR 113.7
million), a second provisional payment of $12.3 million (ZAR 84.0 million)
related to our 2011 tax year in South Africa and paid STC of $15.2 million (ZAR
106.5 million) related to cross-border intercompany dividends paid. We made an
additional second provisional tax payment of $1.8 million (ZAR 12.7 million)
related to our 2010 tax year in South Africa. We also paid taxes totaling $2.6
million in other tax jurisdictions, primarily Korea.
During
fiscal 2010 we made an additional second provisional tax payment of $4.0 million
(ZAR 30.1 million) related to our 2009 tax year in South Africa. In addition, we
made a first provisional payment of $17.8 million (ZAR 133.5 million), a second
provisional payment of $20.3 million (ZAR 155.8 million) related to our 2010 tax
year in South Africa and paid STC of $12.1 million (ZAR 92.2 million) related to
cross-border intercompany dividends paid.
59
Taxes
paid during fiscal 2011 and 2010 were as follows:
Table 22
|
|
Year ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First provisional payments
|
|
16,565
|
|
|
17,788
|
|
|
113,708
|
|
|
133,522
|
|
Second provisional payments
|
|
12,331
|
|
|
20,309
|
|
|
84,019
|
|
|
155,769
|
|
Third provisional payments
|
|
335
|
|
|
239
|
|
|
2,296
|
|
|
1,789
|
|
Taxation paid related to prior years
|
|
1,774
|
|
|
3,996
|
|
|
12,716
|
|
|
30,119
|
|
Taxation refunds received
|
|
(213
|
)
|
|
(241
|
)
|
|
(1,577
|
)
|
|
(1,913
|
)
|
Secondary taxation on companies
|
|
15,216
|
|
|
12,052
|
|
|
106,500
|
|
|
92,215
|
|
Total South African
taxes paid
|
|
46,008
|
|
|
54,143
|
|
|
317,662
|
|
|
411,501
|
|
Foreign taxes paid, primarily
Korea
|
|
2,622
|
|
|
-
|
|
|
18,098
|
|
|
-
|
|
Total
tax paid
|
|
48,630
|
|
|
54,143
|
|
|
335,760
|
|
|
411,501
|
|
Cash
flows from investing activities
During
fiscal 2011, we paid approximately $230.2 million (ZAR 1.6 billion), net of cash
received, for 98.73% of KSNET.
Cash
used in investing activities for fiscal 2011 includes capital expenditure of
$15.1 million (ZAR 105.6 million), primarily for the acquisition of payment
processing terminals in Korea, kiosks to service our EasyPay Kiosk pilot
project, the acquisition of POS devices to service our merchant acquiring
system, the replacement of computer and electronic hardware and the replacement
of motor vehicles.
SmartSwitch
Namibia commenced repayment of loans provided by its shareholders during fiscal
2011 and cash flows from investing activities for fiscal 2011, includes
principal repayments of $0.5 million. In July 2010, we provided additional loan
funding to VTU Colombia of approximately $0.4 million.
Cash
used in investing activities for fiscal 2010 includes capital expenditure of
$2.7 million (ZAR 20.7 million), primarily for the acquisition of POS devices to
service our merchant acquiring system, improvements to leasehold property and
the acquisition of computer equipment.
During
fiscal 2010, we paid $1.0 million (ZAR 7.3 million), net of cash received, for
100% of the outstanding ordinary capital of MediKredit and all claims
outstanding and $9.4 million (ZAR 69.0 million), net of cash received for the
FIHRST business and software.
Cash
used in investing activities for fiscal 2009 includes capital expenditure of
$4.8 million (ZAR 42.6 million), which relates primarily to the purchase of
back-end processing machines to maintain and expand current operations,
equipment acquired for our card manufacturing facility, modifications to
vehicles acquired to distribute social welfare grants, acquisition of POS
terminals for our merchant acquiring system and computer hardware acquired to
upgrade our EasyPay switch and service potential customers.
During
fiscal 2009, we paid $97.9 million (ZAR 767.3 million), net of cash received,
for 80.1% of Net1 UTA, which includes approximately $0.5 million paid to
consultants. In addition, we paid $3.4 million (ZAR 34.8 million) in cash to
acquire a further interest in Finbond and $1.4 million (ZAR 12 million) in cash
to purchase RMT. We also made additional equity investments in VinaPay and VTU
Colombia for a total of approximately $0.6 million and a loan to VTU Colombia of
approximately $0.2 million, all of which were used to fund operating activities.
Cash
flows from financing activities
During
fiscal 2011, we incurred $116.4 million of long-term debt to fund a portion of
the KSNET purchase price and paid facility fees of $3.1 million. We also paid
approximately $0.6 million for the remaining 19.9% of Net1 UTA during fiscal
2011 and acquired 125,392 shares of our common stock for $1.0 million.
During
fiscal 2010 we repurchased, using our ZAR reserves, 9,221,526 shares of our
common stock from Brait S.A.s investment affiliates for $13.50 (ZAR 105.98) per
share, for an aggregate repurchase price of $124.5 million (ZAR 977.3 million).
In addition, we incurred costs of approximately $0.5 million (ZAR 3.9 million)
related to the repurchase of these shares. We also paid $1.3 million on account
of shares we repurchased on June 30, 2009, under our 2009 share buy-back program
and received $0.7 (ZAR 5.5 million) from employees exercising stock options and
repaying loans.
60
During
fiscal 2009, we received and repaid a $110 million short-term loan facility and
we paid the $1.1 million related facility fee. We also acquired 3,621,247 shares
of our common stock for $40.7 million, and received $0.3 million (ZAR2.7
million) from stock option exercises.
Off-Balance Sheet Arrangements
We
have no off-balance sheet arrangements.
Capital Expenditures
Capital
expenditures for the years ended June 30, 2011, 2010 and 2009 were as follows:
Table 23
|
|
Year
ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
ZAR
|
|
|
ZAR
|
|
|
ZAR
|
|
Operating Segment
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based activities
|
|
2,423
|
|
|
2,177
|
|
|
3,161
|
|
|
16,952
|
|
|
16,565
|
|
|
28,258
|
|
International transaction-based activities
|
|
12,113
|
|
|
-
|
|
|
-
|
|
|
84,745
|
|
|
-
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
400
|
|
|
302
|
|
|
751
|
|
|
2,798
|
|
|
2,298
|
|
|
6,714
|
|
Hardware, software and related technology
sales .
|
|
117
|
|
|
251
|
|
|
858
|
|
|
819
|
|
|
1,910
|
|
|
7,670
|
|
Corporate / Eliminations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Consolidated
total
|
|
15,053
|
|
|
2,730
|
|
|
4,770
|
|
|
105,314
|
|
|
20,773
|
|
|
42,642
|
|
We
operate in an environment where the payment of social welfare grants requires
substantial capital investment to establish an operational infrastructure when a
contract commences. Further capital investment is required when the number of
beneficiaries increases to the point where the maximum capacity of the original
infrastructure is exceeded.
Our
capital expenditures for fiscal 2011, 2010 and 2009, are discussed under
Liquidity and Capital ResourcesCash flows from investing activities.
All
of our capital expenditures for the past three fiscal years were funded through
internally generated funds. We had outstanding capital commitments as of June
30, 2011, of $0.4 million related mainly to computer equipment ordered in order
to maintain and expand activities. We anticipate that capital spending for the
first quarter of fiscal 2012 will relate primarily to ongoing replacement of
equipment used to administer and distribute social welfare grants, provide a
switching service through EasyPay and expand our operations in Korea. We expect
to fund these expenditures through internally generated funds.
Contractual Obligations
The
following table sets forth our contractual obligations as of June 30, 2011:
Table 24
|
|
Payments
due by Period, as of June 30, 2011(in $ 000s)
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
than 1
|
|
|
1-3
|
|
|
3-5
|
|
|
than 5
|
|
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
Long-term debt obligations (A)
|
$
|
151,002
|
|
$
|
23,205
|
|
$
|
43,201
|
|
$
|
79,990
|
|
$
|
4,606
|
|
Operating lease obligations
|
|
5,979
|
|
|
3,392
|
|
|
2,587
|
|
|
-
|
|
|
-
|
|
Purchase obligations
|
|
1,881
|
|
|
1,881
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other long-term obligations
|
|
1,272
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,272
|
|
Total
|
$
|
160,134
|
|
$
|
28,478
|
|
$
|
45,788
|
|
$
|
79,990
|
|
$
|
5,878
|
|
|
(A)
|
- Includes $118.0 million of loans under the Facilities
Agreement discussed under Liquidity and capital resources and includes
interest payable under the Facilities Agreement at the rate applicable as
of June 30, 2011.
|
61
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
We
seek to reduce our exposure to currencies other than the South African rand, or
ZAR, through a policy of matching, to the extent possible, assets and
liabilities denominated in those currencies. In addition, we use financial
instruments to economically hedge our exposure to exchange rate and interest
rate fluctuations arising from our operations. We are also exposed to equity
price and liquidity risks as well as credit risks.
Currency
Exchange Risk
We
are subject to currency exchange risk because we purchase inventories that we
are required to settle in other currencies, primarily the euro and US dollar. We
have used forward contracts to limit our exposure in these transactions to
fluctuations in exchange rates between the ZAR, on the one hand, and the US
dollar and the euro, on the other hand. As of June 30, 2011, and 2010, our
outstanding foreign exchange contracts were as follows:
As
of June 30, 2011
None.
As
of June 30, 2010
|
|
|
|
|
|
Fair market
|
|
|
Notional amount
|
|
Strike price
|
|
value price
|
|
Maturity
|
EUR
|
207,000
|
|
ZAR
|
10.1107
|
|
ZAR
|
9.4802
|
|
July 30, 2010
|
EUR
|
31,200
|
|
ZAR
|
9.5976
|
|
ZAR
|
9.5080
|
|
October 9, 2010
|
Translation
Risk
Translation
risk relates to the risk that our results of operations will vary significantly
as the US dollar is our reporting currency, but we earn most of our revenues and
incur most of our expenses in ZAR and generate a significant amount of revenue
and related and operating expenses in KRW. The US dollar fluctuated
significantly over the past three years, including against the ZAR and KRW. As
exchange rates are outside our control, there can be no assurance that future
fluctuations will not adversely affect our results of operations and financial
condition.
Interest
Rate Risk
As
a result of our normal borrowing and leasing activities, our operating results
are exposed to fluctuations in interest rates, which we manage primarily through
our regular financing activities. In addition, outstanding indebtedness under
our Facilities Agreement bears interest at the Korean CD rate plus 4.10% . As
interest rates, and specifically the Korean CD rate, are outside our control,
there can be no assurance that future increases in interest rates, specifically
the Korean CD rate, will not adversely affect our results of operations and
financial condition. As of June 30, 2011, the Korean CD rate was 3.00% .
The
following table illustrates the effect on our annual expected interest charge,
translated at exchange rates applicable as of June 30, 2011, as a result of a
change in the Korean CD rate. The effects of a hypothetical 1% increase and a 1%
decrease in the Korean CD rate as of June 30, 2011, is shown. The selected 1%
hypothetical change does not reflect what could be considered the best or worst
case scenarios.
|
|
As
of June 30, 2011
|
|
Table 25
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
annual
|
|
|
|
|
|
|
|
|
|
expected
|
|
|
|
Annual
|
|
|
|
|
|
interest charge
|
|
|
|
expected
|
|
|
Hypothetical
|
|
|
after change in
|
|
|
|
interest
|
|
|
change in
|
|
|
Korean CD
|
|
|
|
charge
|
|
|
Korean CD
|
|
|
rate
|
|
|
|
($ 000)
|
|
|
rate
|
|
|
($ 000)
|
|
Interest on Facilities Agreement
|
|
8,588
|
|
|
1%
|
|
|
9,798
|
|
|
|
|
|
|
(1)%
|
|
|
7,379
|
|
We
generally maintain limited investment in cash equivalents and have occasionally
invested in marketable securities. The interest earned on our bank balances and
short term cash investments is dependent on the prevailing interest rates in the
jurisdictions where our cash reserves are invested.
62
Credit
Risk
Credit
risk relates to the risk of loss that we would incur as a result of
non-performance by counterparties. We maintain credit risk policies with regard
to our counterparties to minimize overall credit risk. These policies include an
evaluation of a potential counterpartys financial condition, credit rating, and
other credit criteria and risk mitigation tools as our management deems
appropriate.
With
respect to credit risk on financial instruments, we maintain a policy of
entering into such transactions only with South African and European financial
institutions that have a credit rating of BBB or better, as determined by credit
rating agencies such as Standard & Poors, Moodys and Fitch Ratings.
Equity
Price and Liquidity Risk
Equity
price risk relates to the risk of loss that we would incur as a result of the
volatility in the exchange-traded price of equity securities that we hold and
the risk that we may not be able to liquidate these securities. We have invested
in approximately 22% of the issued share capital of Finbond Group Limited which
are exchange-traded equity securities. The fair value of these securities as of
June 30, 2011, represented approximately 1% of our total assets, including these
securities. We expect to hold these securities for an extended period of time
and we are not concerned with short-term equity price volatility with respect to
these securities provided that the underlying business, economic and management
characteristics of the company remain sound.
The
market price of these securities may fluctuate for a variety of reasons,
consequently, the amount we may obtain in a subsequent sale of these securities
may significantly differ from the reported market value.
Liquidity
risk relates to the risk of loss that we would incur as a result of the lack of
liquidity on the exchange on which these securities are listed. We may not be
able to sell some or all of these securities at one time, or over an extended
period of time without influencing the exchange traded price, or at all.
The
following table summarizes our exchange-traded equity securities with equity
price risk as of June 30, 2011. The effects of a hypothetical 10% increase and a
10% decrease in market prices as of June 30, 2011, is also shown. The selected
10% hypothetical change does not reflect what could be considered the best or
worst case scenarios. Indeed, results could be far worse due both to the nature
of equity markets and the aforementioned liquidity risk.
|
|
As
of June 30, 2011
|
|
Table 26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
|
|
|
|
|
|
|
|
Estimated fair
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
value after
|
|
|
Increase
|
|
|
|
Fair
|
|
|
|
|
|
hypothetical
|
|
|
(Decrease) in
|
|
|
|
value
|
|
|
Hypothetical
|
|
|
change in price
|
|
|
Shareholders
|
|
|
|
($ 000)
|
|
|
price change
|
|
|
($ 000)
|
|
|
Equity
|
|
Exchange-traded equity securities .
|
|
8,161
|
|
|
10%
|
|
|
8,977
|
|
|
0.25%
|
|
|
|
|
|
|
(10)%
|
|
|
7,345
|
|
|
(0.25)%
|
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our
consolidated financial statements, together with the report of our independent
registered public accounting firm, appear on pages F-1 through F-51 of this
Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not
applicable.
63
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation
of disclosure controls and procedures
Under
the supervision and with the participation of our management, including our
chief executive officer and our chief financial officer, we conducted an evaluation
of our disclosure controls and procedures, as such term is defined under Rule
13a-15(e) under the Securities Exchange Act of 1934. Based on this evaluation,
the chief executive officer and the chief financial officer concluded that our
disclosure controls and procedures were effective as of June 30, 2011.
Internal
Control over Financial Reporting
Internal
control over financial reporting is a process designed by, or under the
supervision, of the companys chief executive officer and chief financial
officer, or persons performing similar functions, and effected by the companys
board of directors, management, and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with GAAP.
Internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a
material effect on the consolidated financial statements.
Inherent
Limitations in Internal Control over Financial Reporting
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
Managements
Report on Internal Control Over Financial Reporting
Management,
including our chief executive officer and our chief financial officer, is
responsible for establishing and maintaining adequate internal control over our
financial reporting. Management conducted an evaluation of the effectiveness of
internal control over financial reporting based on the Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that our
internal control over financial reporting was effective as of June 30, 2011. As
permitted by the rules of the SEC, management has excluded KSNET from its
evaluation for the year ended June 30, 2011, the year of acquisition. Deloitte
& Touche (South Africa), our independent registered public accounting firm,
has issued an audit report on our internal control over financial reporting,
excluding KSNET. As of June 30, 2011, KSNETs total assets represented
approximately 42% of our consolidated total assets and approximately 46% of
consolidated total current assets. Its total revenues constituted approximately
20% of our consolidated revenue and its operating income constituted
approximately 5% of our consolidated operating income for the year ended June
30, 2011.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting during the most
recent fiscal quarter ended June 30, 2011, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. As stated above, management has excluded KSNET from its evaluation of
the effectiveness of internal control over financial reporting for the year
ended June 30, 2011, the year of acquisition but continues to evaluate KSNETs
internal control over financial reporting. See Item 1ARisk FactorsFailure to
maintain effective internal control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act, especially over companies that we may
acquire, could have a material adverse effect on our business and stock price.
Our management evaluation and auditor attestation regarding the effectiveness of
our internal control over financial reporting as of June 30, 2011, excluded the
operations of KSNET. If we are not able to integrate KSNETs operations into our
internal control over financial reporting, our internal control over financial
reporting may not be effective for additional information.
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Shareholders of Net 1 UEPS Technologies, Inc.
We
have audited the internal controls over financial reporting of Net 1 UEPS
Technologies, Inc. and subsidiaries (the Company) as of June 30, 2011, based
on criteria established in
Internal ControlIntegrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission. As
described in Managements report on Internal Control Over Financial Reporting,
management excluded from its assessment the internal control over financial
reporting at KSNET Incorporated (KSNET), which was acquired on October 29,
2010. As of June 30, 2011, KSNETs combined total assets represented
approximately 42% of consolidated total assets, approximately 46% of
consolidated total current assets and the total revenues constituted
approximately 20% of consolidated revenue and the operating income constituted
approximately 5% of consolidated operating income for the year ended June 30,
2011. Accordingly, our audit did not include the internal control over financial
reporting at KSNET. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Managements report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Companys internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers or persons performing similar functions, and effected by the
company's board of directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of June 30, 2011, based on the
criteria established in
Internal ControlIntegrated Framework
issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended June 30, 2011 of the Company and our
report dated August 25, 2011, expressed an unqualified opinion on those
financial statements.
/s/ Deloitte & Touche (South Africa)
Per PJ Smit
Partner
August 25, 2011
National Executive: GG Gelink Chief Executive AE Swiegers Chief
Operating Officer GM Pinnock Audit
DL Kennedy Risk Advisory NB Kader Tax
& Legal Services L Geeringh Consulting L Bam Corporate Finance
JK
Mazzocco Human Resources CR Beukman Finance TJ Brown Clients & Markets NT
Mtoba Chairman of the
Board MJ Comber Deputy Chairman of the Board
A full list of partners and directors is available on request
65
ITEM 9B. OTHER INFORMATION
None.
66
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Information
about our executive officers is set out in Part I, Item 1 under the caption
Executive Officers and Significant Employees of the Registrant. The other
information required by this Item is incorporated by reference to the sections
of our definitive proxy statement for our 2011 annual meeting of shareholders
entitled Board of Directors and Corporate Governance and Additional
Information.
ITEM 11. EXECUTIVE COMPENSATION
The
information required by this Item is incorporated by reference to the sections
of our definitive proxy statement for our 2011 annual meeting of shareholders
entitled Executive Compensation, Board of Directors and Corporate
GovernanceCompensation of Directors and Remuneration Committee Interlocks
and Insider Participation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
information required by this Item is incorporated by reference to the sections
of our definitive proxy statement for our 2011 annual meeting of shareholders
entitled Security Ownership of Certain Beneficial Owners and Management and
Equity Compensation Plan Information.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The
information required by this Item is incorporated by reference to the sections
of our definitive proxy statement for our 2011 annual meeting of shareholders
entitled Certain Relationships and Related Transactions and Board of
Directors and Corporate Governance.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information required by this Item is incorporated by reference to the sections
of our definitive proxy statement for our 2011 annual meeting of shareholders
entitled Audit and Non-Audit Fees.
67
PART IV
ITEM 15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES
a)
|
The following documents are filed as part of this report
1. Financial Statements
|
|
|
|
The following financial statements are included on pages
F-1 through F-51.
|
2.
Financial Statement Schedules
Financial
statement schedules have been omitted since they are either not required, not
applicable, or the information is otherwise included.
(b) Exhibits
|
|
|
Incorporated
by Reference Herein
|
Exhibit
|
|
Included
|
|
|
|
No.
|
Description of Exhibit
|
Herewith
|
Form
|
Exhibit
|
Filing Date
|
|
|
|
|
|
|
3.1
|
Amended and Restated Articles of Incorporation
|
|
8-K
|
3.1
|
December 1, 2008
|
|
|
|
|
|
|
3.2
|
Amended and Restated By-Laws of Net 1 UEPS
Technologies, Inc.
|
|
8-K
|
3.2
|
November 5, 2009
|
|
|
|
|
|
|
4.1
|
Form of common stock certificate
|
|
S-1
|
4.1
|
June 20, 2005
|
|
|
|
|
|
|
10.1
|
Distribution Agreement, dated July 1, 2002,
between Net 1 UEPS Technologies, Inc. and Net 1 Investment Holdings (Pty)
Limited
|
|
S-4
|
10.1
|
February 3, 2004
|
|
|
|
|
|
|
10.2
|
Patent and Technology Agreement, dated June
19, 2000, by and between Net 1 Holdings S.a.r.1. and Net 1 UEPS Technologies,
Inc.
|
|
S-4
|
10.2
|
February 3, 2004
|
|
|
|
|
|
|
10.3
|
Technology License Agreement between Net
1 Investment Holdings (Proprietary) Limited and Visa International Service
Association
|
|
S-1
|
10.12
|
May 26, 2005
|
|
|
|
|
|
|
10.4
|
Product License Agreement between Net 1 Holdings
S.a.r.1. and Net 1 Operations S.a.r.1.
|
|
S-4/A
|
10.8
|
April 21, 2004
|
|
|
|
|
|
|
10.5
|
Non Exclusive UEPS License Agreement between
Net 1 Investment Holdings (Proprietary) Limited and SIA Netcards
|
|
S-4/A
|
10.10
|
April 21, 2004
|
|
|
|
|
|
|
10.6
|
Assignment of Copyright and License of Patents
and Trade Marks between MetroLink (Proprietary) Limited and Net 1 Products
(Proprietary) Limited
|
|
S-1
|
10.18
|
May 26, 2005
|
|
|
|
|
|
|
10.7
|
Agreement between Nedcor Bank Limited and
Net 1 Products (Proprietary) Limited
|
|
S-1/A
|
10.16
|
July 19, 2005
|
|
|
|
|
|
|
10.8
|
Patent and Technology Agreement by and among
Net 1 Investment Holdings (Proprietary) Limited, Net 1 Applied Technology
Holding Limited and Nedcor Bank Limited
|
|
S-1
|
10.19
|
May 26, 2005
|
68
10.9
|
Patent and Technology Agreement by and among
Net 1 Holdings S.a.r.1., Net 1 Applied Technology Holdings Limited and
Nedcor Bank Limited
|
|
S-1/A
|
10.19
|
July 19, 2005
|
|
|
|
|
|
|
10.10
|
Agreement by and among Nedbank Limited, Net
1 UEPS Technologies, Inc., and Net 1 Applied Technologies South Africa
Limited
|
|
S-1/A
|
10.20
|
July 19, 2005
|
|
|
|
|
|
|
10.11
|
Banking Facility between Nedbank Limited
and Net 1 Applied Technologies South Africa Limited dated as of April
30, 2010
|
|
10-K
|
10.13
|
August 26, 2010
|
|
|
|
|
|
|
10.12*
|
Amended and Restated Stock Incentive Plan
of Net 1 UEPS Technologies, Inc.
|
|
14A
|
A
|
October 28, 2009
|
|
|
|
|
|
|
10.13*
|
Form of Restricted Stock Agreement (employees)
|
|
10-K
|
10.40
|
August 29, 2007
|
|
|
|
|
|
|
10.14*
|
Form of Stock Option Agreement, under Amended
and Restated Stock Incentive Plan
|
|
10-Q
|
10.48
|
November 6, 2008
|
|
|
|
|
|
|
10.15*
|
Form of Restricted
Stock Agreement (non- employee directors)
|
X
|
|
|
|
|
|
|
|
|
|
10.16
|
Share Purchase Agreement, dated as of September
14, 2010, by and among Net 1 UEPS Technologies, Inc., Payment Services
Asia LLC and H&Q NPS Van Investment, Ltd.
|
|
8-K
|
2.1
|
September 17, 2010
|
|
|
|
|
|
|
10.17
|
Senior Facilities Agreement dated October
29, 2010, between Net 1 Applied Technologies Korea, as borrower, Hana
Daetoo Securities Co., Ltd., as mandated lead arranger, Shinhan Bank and
Woori Bank, as co-arrangers, the financial institutions listed therein
as original lenders and Hana Bank, as agent and security agent
|
|
8-K
|
10.51
|
November 3, 2010
|
|
|
|
|
|
|
10.18
|
Service Level Agreement, dated as of August
24, 2010, between the South African Social Security Agency and Cash Paymaster
Services (Pty) Limited
|
|
10-Q
|
10.52
|
November 9, 2010
|
|
|
|
|
|
|
10.19
|
Employment agreement
dated September 17, 2010 between KSNET, Inc. and Phil-Hyun Oh
|
X
|
|
|
|
|
|
|
|
|
|
12
|
Statement of Ratio of Earnings to Fixed Charges
|
X
|
|
|
|
|
|
|
|
|
|
14
|
Amended and Restated Code of Ethics
|
|
8-K
|
14
|
August 27, 2009
|
|
|
|
|
|
|
21
|
Subsidiaries of Registrant
|
X
|
|
|
|
|
|
|
|
|
|
23
|
Consent of Independent
Registered Public Accounting Firm
|
X
|
|
|
|
|
|
|
|
|
|
31.1
|
Certification of
Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of 1934, as amended
|
X
|
|
|
|
|
|
|
|
|
|
31.2
|
Certification of
Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of 1934, as amended
|
X
|
|
|
|
|
|
|
|
|
|
32
|
Certification pursuant
to 18 USC Section 1350
|
X
|
|
|
|
|
|
|
|
|
|
101.INS
|
XBRL Instance Document
|
X
|
|
|
|
|
|
|
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema
|
X
|
|
|
|
|
|
|
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase
|
X
|
|
|
|
|
|
|
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase
|
X
|
|
|
|
|
|
|
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase
|
X
|
|
|
|
|
|
|
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase
|
X
|
|
|
|
____________________
Confidential treatment has
been granted for certain portions of this Exhibit pursuant to Rule 24b-2 of the
Exchange Act, and thus, such portions have been omitted.
* Indicates a
management contract or compensatory plan or arrangement.
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
NET 1 UEPS TECHNOLOGIES, INC.
By: /s/ Serge C.P. Belamant
Serge C.P. Belamant
Chief Executive
Officer, Chairman of the Board and Director
Date: August 25, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
NAME
|
TITLE
|
DATE
|
|
|
|
|
Chief Executive Officer and
Chairman of the Board
|
August 25, 2011
|
/s/ Serge C.P. Belamant
|
and Director (Principal Executive
Officer)
|
|
Serge C.P. Belamant
|
|
|
|
|
|
|
Chief Financial Officer,
Treasurer and Secretary and
|
August 25, 2011
|
/s/ Herman Gideon Kotzé
|
Director (Principal Financial and
Accounting Officer)
|
|
Herman Gideon Kotzé
|
|
|
|
|
|
/s/ Antony Charles Ball
|
Director
|
August 25, 2011
|
Antony Charles Ball
|
|
|
|
|
|
/s/ Christopher Stefan Seabrooke
|
Director
|
August 25, 2011
|
Christopher Stefan Seabrooke
|
|
|
|
|
|
/s/ Alasdair Jonathan Kemsley Pein
|
Director
|
August 25, 2011
|
Alasdair Jonathan Kemsley Pein
|
|
|
|
|
|
/s/ Paul Edwards
|
Director
|
August 25, 2011
|
Paul Edwards
|
|
|
|
|
|
/s/ Tom Tinsley
|
Director
|
August 25, 2011
|
Tom Tinsley
|
|
|
70
NET 1 UEPS TECHNOLOGIES, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Shareholders of Net 1 UEPS Technologies, Inc.
We
have audited the accompanying consolidated balance sheets of Net 1 UEPS
Technologies, Inc. and subsidiaries (the Company) as of June 30, 2011 and 2010
and the related consolidated statements of operations, changes in equity,
comprehensive income and cash flows for each of the three years in the period
ended June 30, 2011. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Net 1 UEPS Technologies, Inc. and
subsidiaries as of June 30, 2011 and 2010, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2011, in conformity with accounting principles generally accepted in the United
States of America.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company's internal control over
financial reporting as of June 30, 2011, based on the criteria established in
Internal ControlIntegrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated August
25, 2011, expressed an unqualified opinion on the Company's internal control
over financial reporting.
/s/ Deloitte & Touche (South Africa)
Per PJ Smit
Partner
August 25, 2011
National Executive: GG Gelink Chief Executive AE Swiegers Chief
Operating Officer GM Pinnock Audit
DL Kennedy Risk Advisory NB Kader Tax
& Legal Services L Geeringh Consulting L Bam Corporate Finance
JK
Mazzocco Human Resources CR Beukman Finance TJ Brown Clients & Markets NT
Mtoba Chairman of the
Board MJ Comber Deputy Chairman of the Board
A full list of partners and directors is available on
request
F-2
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED
BALANCE SHEETS
as of June 30, 2011 and 2010
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands, except share data)
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
95,263
|
|
$
|
153,742
|
|
Pre-funded
social welfare grants receivable (Note 4)
|
|
4,579
|
|
|
6,660
|
|
Accounts receivable, net (Note 5)
|
|
82,780
|
|
|
41,854
|
|
Finance
loans receivable, net
|
|
8,141
|
|
|
4,221
|
|
Deferred expenditure on smart cards
|
|
51
|
|
|
-
|
|
Inventory
(Note 6)
|
|
6,725
|
|
|
3,622
|
|
Deferred income taxes (Note 16)
|
|
15,882
|
|
|
16,330
|
|
Total current assets before settlement assets
|
|
213,421
|
|
|
226,429
|
|
Settlement assets
|
|
186,668
|
|
|
83,661
|
|
Total current assets
|
|
400,089
|
|
|
310,090
|
|
PROPERTY, PLANT AND EQUIPMENT, net (Note 8)
|
|
35,807
|
|
|
7,286
|
|
EQUITY-ACCOUNTED INVESTMENTS (Note 7)
|
|
1,860
|
|
|
2,598
|
|
GOODWILL (Note 9)
|
|
209,570
|
|
|
76,346
|
|
INTANGIBLE ASSETS, net (Note 9)
|
|
119,856
|
|
|
68,347
|
|
OTHER LONG-TERM ASSETS, including available
for sale securities (Note 7)
|
|
14,463
|
|
|
7,423
|
|
TOTAL ASSETS
|
|
781,645
|
|
|
472,090
|
|
LIABILITIES
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Accounts payable
|
|
11,360
|
|
|
3,596
|
|
Other
payables (Note 10)
|
|
71,265
|
|
|
50,855
|
|
Current portion of long-term borrowings (Note 12)
|
|
15,062
|
|
|
-
|
|
Income
taxes payable
|
|
6,709
|
|
|
3,476
|
|
Total current liabilities before settlement obligations
|
|
104,396
|
|
|
57,927
|
|
Settlement obligations
|
|
186,668
|
|
|
83,661
|
|
Total current liabilities
|
|
291,064
|
|
|
141,588
|
|
DEFERRED INCOME TAXES (Note 16)
|
|
52,785
|
|
|
38,858
|
|
LONG-TERM BORROWINGS (Note 12)
|
|
110,504
|
|
|
-
|
|
OTHER LONG-TERM LIABILITIES, including non-controlling interest
loans
|
|
1,272
|
|
|
4,343
|
|
TOTAL LIABILITIES
|
|
455,625
|
|
|
184,789
|
|
COMMITMENTS AND CONTINGENCIES (Note 20)
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
COMMON STOCK (Note 13)
|
|
|
|
|
|
|
Authorized
shares: 200,000,000 with $0.001 par value;
Issued
and outstanding shares, net of treasury: 2011: 45,152,805; 2010: 45,378,397
|
|
59
|
|
|
59
|
|
PREFERRED STOCK
|
|
|
|
|
|
|
Authorized shares: 50,000,000 with $0.001 par value;
|
|
|
|
|
|
|
Issued
and outstanding shares, net of treasury: 2011: -; 2010: -
|
|
-
|
|
|
-
|
|
ADDITIONAL PAID-IN CAPITAL
|
|
136,430
|
|
|
133,543
|
|
TREASURY SHARES, AT COST: 2011: 13,274,434; 2010: 13,149,042
(Note 13)
|
|
(174,694
|
)
|
|
(173,671
|
)
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
|
(33,779
|
)
|
|
(66,396
|
)
|
RETAINED EARNINGS
|
|
394,990
|
|
|
392,343
|
|
TOTAL NET1 EQUITY
|
|
323,006
|
|
|
285,878
|
|
NON-CONTROLLING INTEREST
|
|
3,014
|
|
|
1,423
|
|
TOTAL EQUITY
|
|
326,020
|
|
|
287,301
|
|
TOTAL LIABILITIES AND EQUITY
|
$
|
781,645
|
|
$
|
472,090
|
|
See accompanying notes to consolidated financial statements.
F-3
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
for the years ended June 30, 2011, 2010 and 2009
|
|
2011
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE (Note 14)
|
$
|
343,420
|
|
|
$
|
280,364
|
|
|
$
|
246,822
|
|
Sale of goods
|
|
30,130
|
|
|
|
36,228
|
|
|
|
47,003
|
|
Loan-based interest and
fees received
|
|
7,276
|
|
|
|
4,214
|
|
|
|
5,659
|
|
Services rendered
|
|
306,014
|
|
|
|
239,922
|
|
|
|
194,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, IT
processing, servicing and support
|
|
109,858
|
|
|
|
72,973
|
|
|
|
70,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administration
|
|
119,692
|
|
|
|
80,854
|
|
|
|
64,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
34,671
|
|
|
|
19,348
|
|
|
|
17,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROFIT ON SALE OF MICROLENDING BUSINESS
|
|
-
|
|
|
|
-
|
|
|
|
455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IMPAIRMENT LOSSES (Note 9)
|
|
41,771
|
|
|
|
37,378
|
|
|
|
1,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
37,428
|
|
|
|
69,811
|
|
|
|
93,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOREIGN EXCHANGE GAIN RELATED TO SHORT-TERM
INVESTMENT (Note 22)
|
|
-
|
|
|
|
-
|
|
|
|
26,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST (EXPENSE) INCOME, net
|
|
(1,018
|
)
|
|
|
9,069
|
|
|
|
10,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
36,410
|
|
|
|
78,880
|
|
|
|
130,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (Note 16)
|
|
33,525
|
|
|
|
40,822
|
|
|
|
42,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME BEFORE EARNINGS (LOSS) FROM EQUITY-
ACCOUNTED INVESTMENTS
|
|
2,885
|
|
|
|
38,058
|
|
|
|
88,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) FROM EQUITY-ACCOUNTED INVESTMENTS
(Note 7)
|
|
(339
|
)
|
|
|
93
|
|
|
|
(874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
2,546
|
|
|
|
38,151
|
|
|
|
87,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(ADD) LESS: NET (LOSS) INCOME ATTRIBUTABLE
TO NON- CONTROLLING INTEREST
|
|
(101
|
)
|
|
|
(839
|
)
|
|
|
701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO NET1
|
$
|
2,647
|
|
|
$
|
38,990
|
|
|
$
|
86,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
(Note 17)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings attributable
to Net1 shareholders in $
|
|
0.06
|
|
|
|
0.84
|
|
|
|
1.53
|
|
Diluted earnings attributable to Net1 shareholders
in $
|
|
0.06
|
|
|
|
0.84
|
|
|
|
1.53
|
|
See accompanying notes to consolidated financial statements.
F-4
NET 1 UEPS
TECHNOLOGIES,
INC.
CONSOLIDATED
STATEMENTS
OF
CHANGES
IN
EQUITY
(in
thousands)
|
|
Net 1 UEPS Technologies, Inc.
Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special convertible
|
|
|
B Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
preferred stock
|
|
|
Preference Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
control-
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
Retained
|
|
|
|
|
|
Net1
|
|
|
ling
|
|
|
|
|
|
|
of Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
of Shares
|
|
|
Amount
|
|
|
of Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
AOC(L)I
|
|
|
Equity
|
|
|
Interests
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2008
|
|
53,423,552
|
|
$
|
52
|
|
|
(306,269
|
)
|
$
|
(7,950
|
)
|
$
|
119,283
|
|
|
4,882,429
|
|
$
|
5
|
|
|
35,975,818
|
|
$
|
6
|
|
$
|
266,752
|
|
$
|
(37,820
|
)
|
$
|
340,328
|
|
$
|
-
|
|
$
|
340,328
|
|
Options exercised
|
|
84,414
|
|
|
1
|
|
|
|
|
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
254
|
|
|
|
|
|
254
|
|
Restricted stock granted
|
|
3,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Stock granted pursuant to Net1 UTA
acquisition
|
|
40,134
|
|
|
-
|
|
|
|
|
|
|
|
|
981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
981
|
|
|
|
|
|
981
|
|
Settlement of loan note
consideration for stock issued in accordance with Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
20
|
|
Loan note consideration for stock issued in
accordance with Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
(3
|
)
|
Conversion from special
convertible preferred stock to common stock and cession of B class
preference shares and B class loans to Net 1 as a result of trigger events
|
|
4,882,429
|
|
|
6
|
|
|
|
|
|
|
|
|
4
|
|
|
(4,882,429
|
)
|
|
(5
|
)
|
|
(35,975,818
|
)
|
|
(6
|
)
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
(1
|
)
|
Stock-based compensation charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,239
|
|
|
|
|
|
5,239
|
|
Reversal of stock-based
compensation charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213
|
)
|
|
|
|
|
(213
|
)
|
Treasury shares acquired
|
|
|
|
|
|
|
|
(3,621,247
|
)
|
|
(40,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,687
|
)
|
|
|
|
|
(40,687
|
)
|
Income tax benefits from
stock awards sold by employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,350
|
|
|
|
|
|
1,350
|
|
Net1 UTA non- controlling interest acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,838
|
|
|
1,838
|
|
Comprehensive income, net of
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,601
|
|
|
|
|
|
86,601
|
|
|
701
|
|
|
87,302
|
|
Other comprehensive (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss
on
available
for sale investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,611
|
)
|
|
(1,611
|
)
|
|
|
|
|
(1,611
|
)
|
Movement
in
foreign
currency
translation reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,041
|
)
|
|
(19,041
|
)
|
|
|
|
|
(19,041
|
)
|
Balance June 30, 2009
|
|
58,434,003
|
|
$
|
59
|
|
|
(3,927,516
|
)
|
$
|
(48,637
|
)
|
$
|
126,914
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
$
|
353,353
|
|
$
|
(58,472
|
)
|
$
|
373,217
|
|
$
|
2,539
|
|
$
|
375,756
|
|
F-5
NET 1 UEPS
TECHNOLOGIES,
INC.
CONSOLIDATED
STATEMENTS
OF
CHANGES
IN
EQUITY
(in
thousands)
|
|
Net 1 UEPS Technologies, Inc.
Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Retained
|
|
|
|
|
|
Total Net1
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Earnings
|
|
|
AOC(L)I
|
|
|
Equity
|
|
|
Interests
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2009
|
|
58,434,003
|
|
$
|
59
|
|
|
(3,927,516
|
)
|
$
|
(48,637
|
)
|
$
|
126,914
|
|
$
|
353,353
|
|
$
|
(58,472
|
)
|
$
|
373,217
|
|
$
|
2,539
|
|
$
|
375,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
83,338
|
|
|
-
|
|
|
|
|
|
|
|
|
303
|
|
|
|
|
|
|
|
|
303
|
|
|
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
10,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of loan note consideration for
stock issued in accordance with 2004 Stock Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
417
|
|
|
|
|
|
|
|
|
417
|
|
|
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,670
|
|
|
|
|
|
|
|
|
5,670
|
|
|
|
|
|
5,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares acquired (Note 13)
|
|
|
|
|
|
|
|
(9,221,526
|
)
|
|
(125,034
|
)
|
|
|
|
|
|
|
|
|
|
|
(125,034
|
)
|
|
|
|
|
(125,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefits from stock awards sold
by employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
|
239
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,990
|
|
|
|
|
|
38,990
|
|
|
(839
|
)
|
|
38,151
|
|
Other
comprehensive (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss on available for sale investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(684
|
)
|
|
(684
|
)
|
|
|
|
|
(684
|
)
|
Movement
in foreign currency translation reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,240
|
)
|
|
(7,240
|
)
|
|
(277
|
)
|
|
(7,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2010
|
|
58,527,439
|
|
$
|
59
|
|
|
(13,149,042
|
)
|
$
|
(173,671
|
)
|
$
|
133,543
|
|
$
|
392,343
|
|
$
|
(66,396
|
)
|
$
|
285,878
|
|
$
|
1,423
|
|
$
|
287,301
|
|
F-6
NET 1 UEPS
TECHNOLOGIES,
INC.
CONSOLIDATED
STATEMENTS
OF
CHANGES
IN
EQUITY
(in
thousands)
|
|
Net 1 UEPS Technologies, Inc.
Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Retained
|
|
|
|
|
|
Total Net1
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Earnings
|
|
|
AOC(L)I
|
|
|
Equity
|
|
|
Interests
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2010
|
|
58,527,439
|
|
$
|
59
|
|
|
(13,149,042
|
)
|
$
|
(173,671
|
)
|
$
|
133,543
|
|
$
|
392,343
|
|
$
|
(66,396
|
)
|
$
|
285,878
|
|
$
|
1,423
|
|
$
|
287,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
156,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of loan note consideration for
stock issued in accordance with 2004 Stock Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,212
|
|
|
|
|
|
|
|
|
5,212
|
|
|
|
|
|
5,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of stock-based compensation charge
|
|
(257,156
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,492
|
)
|
|
|
|
|
|
|
|
(3,492
|
)
|
|
|
|
|
(3,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares acquired (Note 13)
|
|
|
|
|
|
|
|
(125,392
|
)
|
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,023
|
)
|
|
|
|
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilization of income tax benefits from
stock awards sold by employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
(68
|
)
|
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of KSNET (note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
3,097
|
|
|
3,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of 19.90% non-controlling
interest (note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,215
|
|
|
|
|
|
(290
|
)
|
|
925
|
|
|
(1,809
|
)
|
|
(884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,647
|
|
|
|
|
|
2,647
|
|
|
(101
|
)
|
|
2,546
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss on available for sale investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(691
|
)
|
|
(691
|
)
|
|
|
|
|
(691
|
)
|
Movement
in foreign currency translation reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,598
|
|
|
33,598
|
|
|
404
|
|
|
34,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2011
|
|
58,427,239
|
|
$
|
59
|
|
|
(13,274,434
|
)
|
$
|
(174,694
|
)
|
$
|
136,430
|
|
$
|
394,990
|
|
$
|
(33,779
|
)
|
$
|
323,006
|
|
$
|
3,014
|
|
$
|
326,020
|
|
See accompanying notes to consolidated financial statements.
F-7
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
for the years ended June 30, 2011, 2010 and 2009
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
2,647
|
|
$
|
38,990
|
|
$
|
86,601
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(loss):
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on asset available
for sale
|
|
(691
|
)
|
|
(684
|
)
|
|
(1,611
|
)
|
Movement in foreign
currency translation reserve
|
|
33,598
|
|
|
(7,240
|
)
|
|
(19,041
|
)
|
Total other comprehensive income (loss)
|
|
32,907
|
|
|
(7,924
|
)
|
|
(20,652
|
)
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
35,554
|
|
|
31,066
|
|
|
65,949
|
|
(Add) Less
comprehensive (loss) income attributable to
non-
controlling
interest
|
|
(303
|
)
|
|
1,116
|
|
|
(701
|
)
|
Comprehensive income attributable to Net1
|
$
|
35,857
|
|
$
|
29,950
|
|
$
|
66,650
|
|
See accompanying notes to consolidated financial statements.
F-8
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
for the years ended June 30, 2011, 2010 and 2009
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
2,546
|
|
$
|
38,151
|
|
$
|
87,302
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
34,671
|
|
|
19,348
|
|
|
17,082
|
|
Impairment of intangible asset
|
|
41,771
|
|
|
-
|
|
|
-
|
|
Impairment of goodwill
|
|
-
|
|
|
37,378
|
|
|
1,836
|
|
Loss (Earnings) from equity-accounted
investments
|
|
339
|
|
|
(93
|
)
|
|
874
|
|
Fair value adjustment
|
|
728
|
|
|
78
|
|
|
(4,402
|
)
|
Interest payable
|
|
2,487
|
|
|
301
|
|
|
425
|
|
Facility fee amortized
|
|
1,958
|
|
|
-
|
|
|
1,100
|
|
(Profit) Loss on disposal of property,
plant and equipment
|
|
(5
|
)
|
|
69
|
|
|
85
|
|
Profit on disposal of
VinaPay (2011) and Moneyline business (2009)
|
|
(14
|
)
|
|
-
|
|
|
(455
|
)
|
Stock compensation charge, net of
forfeitures
|
|
1,720
|
|
|
5,670
|
|
|
5,026
|
|
Decrease (Increase) in
accounts receivable, pre-funded social welfare
|
|
|
|
|
|
|
|
|
|
grants receivable and finance loans
receivable
|
|
(3,568
|
)
|
|
4,666
|
|
|
14,639
|
|
Decrease in deferred
expenditure on smart cards
|
|
-
|
|
|
8
|
|
|
50
|
|
Decrease (Increase) in inventory
|
|
289
|
|
|
3,867
|
|
|
(81
|
)
|
Decrease in accounts
payable and other payables
|
|
(1,041
|
)
|
|
(27,138
|
)
|
|
(8,788
|
)
|
Decrease in taxes payable
|
|
(1,800
|
)
|
|
(7,582
|
)
|
|
(3,339
|
)
|
Decrease in deferred
taxes
|
|
(13,858
|
)
|
|
(6,040
|
)
|
|
(4,586
|
)
|
Net cash
provided by operating activities
|
|
66,223
|
|
|
68,683
|
|
|
106,768
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(15,053
|
)
|
|
(2,730
|
)
|
|
(4,770
|
)
|
Proceeds from disposal of property, plant
and equipment
|
|
76
|
|
|
106
|
|
|
159
|
|
Acquisition of KSNET, net of cash acquired (Note 3)
|
|
(230,225
|
)
|
|
-
|
|
|
-
|
|
Acquisition of MediKredit, FIHRST and RMT,
net of cash acquired (Note 3)
|
|
-
|
|
|
(10,319
|
)
|
|
(1,381
|
)
|
Acquisition of Net1 UTA, net of cash acquired (Note 3)
|
|
-
|
|
|
-
|
|
|
(97,992
|
)
|
Acquisition of available-for-sale
securities
|
|
-
|
|
|
-
|
|
|
(3,422
|
)
|
Proceeds from disposal of VinaPay
|
|
150
|
|
|
-
|
|
|
-
|
|
Acquisition of and advance of loans to
equity-accounted investments
|
|
(375
|
)
|
|
-
|
|
|
(450
|
)
|
Repayment of loan by equity-accounted investment
|
|
475
|
|
|
-
|
|
|
-
|
|
Other investing activities
|
|
35
|
|
|
-
|
|
|
-
|
|
Net change in settlement assets
|
|
(78,768
|
)
|
|
(77,243
|
)
|
|
-
|
|
Net cash used in
investing activities
|
|
(323,685
|
)
|
|
(90,186
|
)
|
|
(107,856
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
Proceeds from issue of common stock
|
|
-
|
|
|
720
|
|
|
271
|
|
Loan portion related to options
|
|
20
|
|
|
-
|
|
|
-
|
|
Acquisition of treasury stock (Note 13)
|
|
(1,023
|
)
|
|
(126,304
|
)
|
|
(39,412
|
)
|
Long-term borrowings obtained (Note 12)
|
|
116,353
|
|
|
-
|
|
|
-
|
|
Proceeds from short-term loan facility
(Note 11)
|
|
-
|
|
|
-
|
|
|
110,000
|
|
Repayment of short-term loan facility (Note 11)
|
|
-
|
|
|
-
|
|
|
(110,000
|
)
|
Payment of facility fee (Note 12)
|
|
(3,088
|
)
|
|
-
|
|
|
(1,100
|
)
|
Repayment of short-term borrowings
|
|
(6,705
|
)
|
|
-
|
|
|
-
|
|
Proceeds from bank overdraft
|
|
-
|
|
|
-
|
|
|
2,843
|
|
Repayment of bank overdraft
|
|
(462
|
)
|
|
(137
|
)
|
|
(2,850
|
)
|
Acquisition of remaining 19.9% of Net1 UTA
|
|
(594
|
)
|
|
-
|
|
|
-
|
|
Net change in settlement obligations
|
|
78,768
|
|
|
77,243
|
|
|
-
|
|
Net cash provided by
(used in) financing activities
|
|
183,269
|
|
|
(48,478
|
)
|
|
(40,248
|
)
|
Effect of exchange rate changes on cash
|
|
15,714
|
|
|
2,937
|
|
|
(10,353
|
)
|
Net decrease in cash and cash
equivalents
|
|
(58,479
|
)
|
|
(67,044
|
)
|
|
(51,689
|
)
|
Cash and cash equivalents beginning of year
|
|
153,742
|
|
|
220,786
|
|
|
272,475
|
|
Cash and cash equivalents at end of
year
|
$
|
95,263
|
|
$
|
153,742
|
|
$
|
220,786
|
|
See accompanying notes to consolidated financial statements.
F-9
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial
statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
1.
DESCRIPTION
OF BUSINESS AND BASIS OF PRESENTATION
Description
of Business
Net
1 UEPS Technologies, Inc. (Net1 and collectively with its consolidated
subsidiaries, the Company) was incorporated in the State of Florida on May 8,
1997. The Company provides payment solutions and transaction processing services
across a wide range of industries and in various geographies. It has developed
and markets a smart-card based alternative payment system for the unbanked and
underbanked populations of developing economies. Its universal electronic
payment system (UEPS) uses biometrically secure smart cards that operate in
real-time but offline, which allows users to enter into transactions at any time
with other card holders in even the most remote areas. The Company also develops
and provides secure transaction technology solutions and services, and offers
transaction processing, financial and clinical risk management solutions to
various industries. The Companys technology is widely used in South Africa
today, where it distributes pension and welfare payments to over 3.2 million
recipients in five of South Africas nine provinces, processes debit and credit
card payment transactions on behalf of retailers through its EasyPay system,
processes value-added services such as bill payments and prepaid electricity for
the major bill issuers and local councils in South Africa and provides mobile
telephone top-up transactions for the major South African mobile carriers. The
Company also processes third-party payroll payments for employees through its
FIHRST system and provides funders and providers of healthcare with an on-line
real-time management system for healthcare transactions through its MediKredit
service. Through KSNET, the Company offers card processing, payment gateway
(PG) and banking value-added services (VAN) in Korea.
Basis
of presentation
The
accompanying consolidated financial statements include subsidiaries over which
Net1 exercises control and have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP).
2.
SIGNIFICANT
ACCOUNTING POLICIES
Principles
of consolidation
The
financial statements of entities which are controlled by Net1, referred to as
subsidiaries, are consolidated. Inter-company accounts and transactions are
eliminated upon consolidation.
The
Company, if it is the primary beneficiary, consolidates entities which are
considered to be variable interest entities (VIE). The primary beneficiary is
considered to be the entity that will absorb a majority of the entity's expected
losses, receive a majority of the entity's expected residual returns, or both.
No entities were required to be consolidated in terms of these requirements
during the years ended June 30, 2011 and 2010.
Use
of estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Property,
plant and equipment
Property,
plant and equipment are shown at cost less accumulated depreciation. Property,
plant and equipment are depreciated on the straight-line basis at rates which
are estimated to amortize the assets to their anticipated residual values over
their useful lives. Within the following asset classifications, the expected
economic lives are approximately:
Computer equipment
|
3 to 5 years
|
Office equipment
|
2 to 10 years
|
Vehicles
|
4 to 8 years
|
Furniture and fittings
|
5 to 10 years
|
Plant and equipment
|
5 to 10 years
|
F-10
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Property,
plant and equipment (continued)
The
gain or loss arising on the disposal or retirement of an asset is determined as
the difference between the sales proceeds and the carrying amount of the asset
and is recognized in income.
Leasehold
improvement costs
Costs
incurred in the adaptation of leased properties to serve the requirements of the
Company are capitalized and amortized over the shorter of the estimated useful
life of the asset and the remaining term of the lease.
Sales
taxes
Revenue
and expenses are presented net of sales, use and value added taxes, as the case
may be.
Income
taxes
The
Company provides for income taxes using the asset and liability method. This
approach recognizes the amount of taxes payable or refundable for the current
year, as well as deferred tax assets and liabilities for the future tax
consequence of events recognized in the financial statements and tax returns.
Deferred income taxes are adjusted to reflect the effects of changes in tax laws
or enacted tax rates.
The
tax rate in South Africa varies depending on whether income is distributed.
During the years ended June 30, 2011, 2010 and 2009, the income tax rate was
28%, but upon distribution an additional tax (STC) of 10% was due based on the
amount of dividends declared net of dividends received during a dividend cycle.
The Company therefore measures its income taxes and deferred income taxes for
the year ended June 30, 2011, 2010 and 2009 using a combined rate of 34.55%
.
In
establishing the appropriate income tax valuation allowances, the Company
assesses the realizability of its net deferred tax assets, and based on all
available evidence, both positive and negative, determines whether it is more
likely than not that the net deferred tax assets or a portion thereof will be
realized.
Uncertain
tax positions are recognized in the financial statements for positions which are
considered more likely than not of being sustained based on the technical merits
of the position on audit by the tax authorities. The measurement of the tax
benefit recognized in the financial statements is based upon the largest amount
of tax benefit that, in managements judgement, is greater than 50% likely of
being realized based on a cumulative probability assessment of the possible
outcomes.
The
Companys policy is to include interest related to unrecognized tax benefits in
interest income, net and penalties in selling, general and administration in the
consolidated statements of operations.
Goodwill
Goodwill
represents the excess of the purchase price of an acquired enterprise over the
fair values of the identifiable assets acquired and liabilities assumed. The
Company tests for impairment of goodwill on an annual basis and at any other
time if events or circumstances change that would more likely than not reduce
the fair value of the reporting unit goodwill below its carrying amount.
Circumstances
that could trigger an impairment test include but are not limited to: a
significant adverse change in the business climate or legal factors; an adverse
action or assessment by a regulator; unanticipated competition; loss of key
personnel; the likelihood that a reporting unit or significant portion of a
reporting unit will be sold or otherwise disposed; and results of testing for
recoverability of a significant asset group within a reporting unit.
F-11
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Goodwill
(continued)
If
the carrying amount of the reporting unit goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recorded in the statement of
operations. Measurement of the fair value of a reporting unit is based on one or
more of the following fair value measures: the amount at which the unit as a
whole could be bought or sold in a current transaction between willing parties;
present value techniques of estimated future cash flows; or valuation techniques
based on multiples of earnings or revenue, or a similar performance measure.
Intangible
assets
Intangible
assets are shown at cost less accumulated amortization. Intangible assets are
amortized over the following useful lives:
Customer relationships
|
1 to 15 years
|
Software and unpatented technology
|
3 to 5 years
|
FTS patent
|
10 years
|
Exclusive licenses
|
7 years
|
Trademarks
|
3 to 20 years
|
Customer databases
|
3 years
|
Intangible
assets are periodically evaluated for recoverability, and those evaluations take
into account events or circumstances that warrant revised estimates of useful
lives or that indicate that impairment exists.
Equity-accounted
investments
The
Company uses the equity method to account for investments in companies when it
has significant influence but not control over the operations of the
equity-accounted company. Under the equity method, the Company initially records
the investment at cost and then adjusts the carrying value of the investment to
recognize the proportional share of the equity-accounted companys net income
(loss). In addition, dividends received from the equity-accounted company reduce
the carrying value of the Companys investment.
Inventory
Inventory
is valued at the lower of cost and market value. Cost is determined on a
first-in, first-out basis and includes transport and handling costs.
Translation
of foreign currencies
The
primary functional currency of the Company is the South African Rand (ZAR) and
its reporting currency is the US dollar. The Company also has consolidated
entities which have the euro, Russian ruble, Korean won (KRW) or Indian rupee
as their functional currency. The current rate method is used to translate the
financial statements of the Company to US dollar. Under the current rate method,
assets and liabilities are translated at the exchange rates in effect at the
balance sheet date. Revenues and expenses are translated at average rates for
the period. Translation gains and losses are reported in accumulated other
comprehensive income in total equity.
Foreign
exchange transactions are translated at the spot rate ruling at the date of the
transaction. Monetary items are translated at the closing spot rate at the
balance sheet date. Transactional gains and losses are recognized in income for
the period.
F-12
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Revenue
recognition
The
Company recognizes revenue when:
-
there is persuasive evidence of an agreement or arrangement;
-
delivery of products has occurred or services have been rendered;
-
the sellers price to the buyer is fixed or determinable; and
-
collectability is reasonably assured.
The
Companys principal revenue streams and their respective accounting treatments
are discussed below:
Fees
Pension
and welfare and South African participating merchants
The
Company provides a state welfare benefit distribution service to governmental
agencies in South Africa. Fees are computed based on the number of beneficiaries
included in the government payfile. Fee income received for these services is
recognized in the statement of operations when distributions have been made to
the beneficiaries.
Beneficiaries
are able to load their welfare grants at merchants enrolled in the Companys
participating retailer program in certain provinces. There is no charge to the
beneficiary to load the grant onto a smart card at the merchant location,
however, a fee is charged to the merchant for purchases made at the merchant
using the smart card. A fee is also charged to the merchant when the beneficiary
makes a cash withdrawal. Fee income received for these services is recognized in
the statement of operations when the transaction occurs.
Card
VAN, banking VAN and payment gateway
Card
VAN services consist of services relating to authorization of credit card
transactions including transmission of transaction details (authorization
service), and collection of receipts associated with the credit card
transactions (collection service). With its authorization service, the Company
connects credit card companies with merchants online when a customer uses
his/her credit card via terminals installed at merchants sites and the
Companys central processing server for approval of credit card transactions.
Immediately after approval of credit card transactions, the Company transmits
details of the transactions to credit card companies online for processing
payments. Collection service captures the transaction data and gathers receipts
as documented evidence and provides them to credit card companies upon request.
The Company earns service fees based on the number of transactions processed for
credit card companies when services are rendered in accordance with the
contracts entered into between credit card companies and the Company. The
Company bills for its service charges to credit card companies each month. Each
service could be provided either individually or collectively, based on terms of
contracts.
The
Company charges commission fees to credit card companies for the authorization
service provided based on the number of approvals transferred. The right to
receive a service fee is due once a credit card transaction has been approved
and details of the transaction are transmitted by the Company. Therefore,
revenues from the authorization service are recognized when the credit card
transactions are authorized and details of the transactions are transmitted. The
Company earns a collection service fee once it has provided settled funds to the
credit card companies. Therefore, revenue from the collection service is
recognized when the Company collects the receipts and provides them to the card
companies.
F-13
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Revenue
recognition (continued)
Fees
(continued)
Card
VAN, banking VAN and payment gateway (continued)
For
multiple-element arrangements, the Company has identified two deliverables. The
first deliverable is the authorization service, and the second deliverable is
the collection service. The Company evaluates each deliverable in an arrangement
to determine whether it represents a separate unit of accounting. A deliverable
constitutes a separate unit of accounting when it has standalone value and there
are no customer-negotiated refunds or return rights for the delivered elements.
If the arrangement includes a customer-negotiated refund or return right
relative to the delivered item and the delivery and performance of the
undelivered item is considered probable and substantially in the Company's
control, the delivered element constitutes a separate unit of accounting. In
instances when the aforementioned criteria are not met, the deliverable is
combined with the undelivered elements and the allocation of the arrangement
consideration and revenue recognition is determined for the combined unit as a
single unit. Allocation of the consideration is determined at arrangement
inception on the basis of each unit's relative selling price. In such
circumstances, the Company uses a hierarchy to determine the selling price to be
used for allocating revenue to deliverables: (i) vendor-specific objective
evidence of fair value (VSOE), (ii) third-party evidence of selling price
(TPE), and (iii) best estimate of the selling price (ESP).
VSOE
generally exists only when the Company sells the deliverable separately and is
the price actually charged by the Company for that deliverable. ESPs reflect the
Companys best estimates of what the selling prices of elements would be if they
were sold regularly on a stand-alone basis. Because the Company has neither VSOE
nor TPE for the two deliverables, the allocation of revenue has been based on
the Companys ESPs. Amounts allocated to the authorization and the collection
service are recognized at the time of service provided the other conditions for
revenue recognition have been met.
The
Companys process for determining its ESP for deliverables without VSOE or TPE
considers multiple factors that may vary depending upon the unique facts and
circumstances related to each deliverable. Key factors considered by the Company
in developing the ESPs include prices charged by the Company, historical pricing
practices and controls, range of prices for various customers and the nature of
the services. Consideration is also given to market conditions such as
competitor pricing strategies and market perception.
Banking
VAN is a division supporting a companys fund management business (large payment
transfers, collections, etc.) by relaying financial transactions between client
companies and financial institutions. Financial transactions between two or more
business enterprises, or between business enterprises and their customers, are
conducted through the transaction-processing network established between the
Company and the banks. Revenue from the banking VAN service is recognized when
the service is rendered by the Company.
With
its PG service, the Company provides the Internet-based settlement service
between an on-line shopping mall and a credit card company when a customer uses
his/her credit card, debit card or on-line payment to pay for goods or services.
The Company receives fees for carrying out settlements for electronic
transactions. Revenue from the PG service is recognized when the service is
rendered by the Company.
Other
fees
The
Company provides an automated payment collection service to third parties, for
which it charges monthly fees. These fees are recognized in the statement of
operations as the underlying services are performed.
The
Company provides medical-related claims adjudication, reconciliation and
settlement services (medical-related claim service) to customers, for which it
charges fees. These fees are recognized in the statement of operations as the
underlying services are performed.
F-14
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Revenue
recognition (continued)
Contract
variations fees
The
Company records additional revenue from variations to contracts for the
provision of state welfare benefits, if:
-
there is persuasive evidence of an agreement; and
-
collectability is reasonably assured; and
-
all material terms and conditions of the agreement have been adhered to.
Hardware
sales
Revenue
from hardware sales is recognized when risk of loss has transferred to the
customer and there are no unfulfilled Company obligations that affect the
customers final acceptance of the arrangement. Any cost of warranties and
remaining obligations that are inconsequential or perfunctory are accrued when
the corresponding revenue is recognized.
The
Company buys terminals from manufacturers, and subsequently sells them through
its agencies. Revenue is recognized when significant risks and rewards of
ownership of terminals have passed to the buyer, usually on delivery of the
terminals to the buyer.
To
the extent that sales of hardware are made in an arrangement that includes
software that is more than incidental, the Company considers post-contract
maintenance and technical support or other future obligations which could impact
the timing and amount of revenue recognized.
Software
Revenue
from licensed software is recognized on a subscription basis over the period
that the client is entitled to use the license. Revenue from the sale of
software is recognized if all revenue recognition criteria have been met.
Post-contract maintenance and technical support in respect of software is
generally negotiated and sold as a separate service and is recognized over the
period such items are delivered.
Interest
income
Interest
income earned from micro-lending activities is recognized in the statement of
operations as it falls due, using the effective interest rate method by
reference to the constant interest rate stated in each loan agreement. Fees
earned for establishing loans are recognized over the period of the loan as
interest income.
Capital
and interest that is in arrears and determined to be doubtful is provided for in
full if the capital outstanding has not been insured. The Company insures
against losses of capital related to certain loans. For these loans, provision
is made for the amount of interest previously recognized in the statement of
operations if it is determined that the interest outstanding will not be
collected.
Systems
implementation projects
The
Company undertakes smart card system implementation projects. The hardware and
software installed in these projects are in the form of customized systems,
which ordinarily involve modification to meet the customers specifications.
Software delivered under such arrangements is available to the customer
permanently, subject to the payment of annual license fees. Revenue for such
arrangements is recognized under the percentage of completion method, save for
annual license fees, which are recognized in the period to which they relate.
Up-front and interim payments received are recorded as client deposits until
customer acceptance.
F-15
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Systems
implementation projects (continued)
The
Companys customer arrangements may have multiple deliverables. Generally, the
Companys multiple element arrangements fall within the scope of specific
accounting standards that provide guidance regarding the separation of elements
in multiple-deliverable arrangements and the allocation of consideration among
those elements. If not, the Company unbundles multiple element arrangements into
separate units of accounting when the delivered element(s) has stand-alone value
and fair value of the undelivered element(s) exists.
Terminal
rental income
The
Company leases terminals to merchants participating in its merchant acquiring
system. Operating rental income is recognized monthly on a straight-line basis
in accordance with the lease agreement.
Other
income
Revenue
from service and maintenance activities is charged to customers on a
time-and-materials basis and is recognized in the statement of operations as
services are delivered to customers.
Research
and development expenditure
Research
and development expenditures is charged to net income in the period in which it
is incurred. During the years ended June 30, 2011, 2010 and 2009, the Company
incurred research and development expenditures of $5.7 million, $7.6 million and
$8.9 million, respectively.
Computer
software development
Product
development costs in respect of software intended for sale to licensees are
expensed as incurred until technological feasibility is attained. Technological
feasibility is attained when the Companys software has completed system testing
and has been determined to be viable for its intended use. The time between the
attainment of technological feasibility and completion of software development
is generally short with immaterial amounts of development costs incurred during
this period.
Costs
in respect of the development of software for the Companys internal use are
expensed as incurred, except to the extent that these costs are incurred during
the application development stage. All other costs including those incurred in
the project development and post-implementation stages are expensed as incurred.
Settlement
assets and settlement obligations
Settlement
assets comprise (1) cash received from the South African government that the
Company holds pending disbursement to beneficiaries of social welfare grants,
(2) cash received from health care plans which the Company disburses to health
care service providers once it adjudicates claims and (3) cash received from
customers on whose behalf the Company processes payroll payments that the
Company will disburse to customer employees, payroll-related payees and other
payees designated by the customer.
Settlement
obligations comprise (1) amounts that the Company is obligated to disburse to
beneficiaries of social welfare grants, (2) amounts which are due to health care
service providers after claims have been adjudicated and reconciled, provided
that the Company shall have previously received such funds from health care plan
customers and (3) amounts that the Company is obligated to pay to customer
employees, payroll-related payees and other payees designated by the customer.
F-16
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Loan
provisions and allowance for doubtful debts
UEPS-based
lending
No
provision is required for UEPS-based lending. The principal amount of the loan
is insured and the amount due to be recovered from the insurer is recorded as a
receivable once the amount is deemed unrecoverable. Default is considered when
the beneficiary dies or can not be found. Once the loan is deemed unrecoverable,
service fees related to the unrecoverable insured loan is not recognized.
Traditional
microlending
The
Company sold its traditional microlending business during fiscal 2009. Prior to
disposition of this business, a specific provision was established for all
traditional microlending loans where it was considered likely that all or a
portion of the principal amount of the loan or interest thereon would not be
repaid by the borrower. Default was considered likely after a specified period
of repayment default, which was generally not more than 150 days. The provision
was assessed based on a review by management of the ageing of outstanding
amounts, the payment history in relation to those specific accounts and the
overall default history.
Allowance
for doubtful debts
A
specific provision is established where it is considered likely that all or
a portion of the amount due from customers renting point of sale (POS)
equipment, receiving support and maintenance or transaction services or purchasing
licenses from the Company will not be recovered. Non-recoverability is assessed
based on a review by management of the ageing of outstanding amounts, the location
of the customer and the payment history in relation to those specific amounts.
Stock-based
compensation
Stock-based
compensation represents the cost related to stock-based awards granted. The
Company measures stock-based compensation cost at the grant date, based on the
estimated fair value of the award, and recognizes the cost as an expense on a
straight-line basis (net of estimated forfeitures) over the requisite service
period. In respect of awards with only service conditions that have a graded
vesting schedule, the Company recognizes compensation cost on a straight-line
basis over the requisite service period for the entire award. The forfeiture
rate is estimated using historical trends of the number of awards forfeited
prior to vesting. The expense is recorded in the statement of operations and
classified based on the recipients respective functions.
The
Company records deferred tax assets for awards that result in deductions on the
Companys income tax returns, based on the amount of compensation cost
recognized and the Companys statutory tax rate in the jurisdiction in which it
will receive a deduction. Differences between the deferred tax assets recognized
for financial reporting purposes and the actual tax deduction reported on the
Companys income tax return are recorded in additional paid-in capital (if the
tax deduction exceeds the deferred tax asset) or in the statement of operations
(if the deferred tax asset exceeds the tax deduction and no additional paid-in
capital exists from previous awards).
Recent
accounting pronouncements adopted
The
following summary of recent accounting pronouncements reflects only the new
authoritative accounting guidance issued that is relevant and applicable to the
Company.
On
July 1, 2010, the Company adopted the new Financial Accounting Standards Board
(FASB) guidance on the consolidation of variable interest entities. This
guidance changed how a reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a reporting entity
is required to consolidate another entity is based on, among other things, the
other entitys purpose and design and the reporting entitys ability to direct
the activities of the other entity that most significantly impact the other
entitys economic performance. The guidance also requires a reporting entity to
provide additional disclosures about its involvement with variable interest
entities and any significant changes in risk exposure due to such involvement.
The adoption of this guidance did not have an impact on the Companys
consolidated financial statements.
F-17
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Recent
accounting pronouncements adopted (continued)
On
July 1, 2010, the Company adopted the new FASB guidance issued on the accounting
for transfers of financial assets. This guidance requires more information about
transfers of financial assets, including securitization transactions, and where
entities have continuing exposure to the risks related to transferred financial
assets. It eliminates the concept of a qualifying special-purpose entity,
changes the requirements for de-recognizing financial assets, and requires
additional disclosures. The adoption of this guidance did not have an impact on
the Companys consolidated financial statements.
On
July 1, 2010, the Company adopted the new FASB guidance on revenue recognition
in multiple-deliverable revenue arrangements. The guidance amended the existing
guidance on allocating consideration received between the elements in a
multiple-deliverable arrangement and established a selling price hierarchy for
determining the selling price of a deliverable. The selling price used for each
deliverable will be based on VSOE if available, third-party evidence if VSOE is
not available, or estimated selling price if neither VSOE nor third-party
evidence is available. The guidance replaced the term fair value in the
revenue allocation with selling price to clarify that the allocation of
revenue is based on entity specific assumptions rather than the assumptions of a
market place participant. The guidance eliminates the residual method of
allocation and requires that arrangement consideration be allocated using the
relative selling price method. It also significantly expands the disclosures
related to a vendors multiple-deliverable revenue arrangements. The adoption of
this guidance did not have an impact on the Companys consolidated financial
statements for the periods presented.
On
July 1, 2010, the Company adopted the new FASB guidance which amended the scope
of existing software revenue recognition accounting. Tangible products
containing software components and non-software components that function
together to deliver the products essential functionality would be scoped out of
the accounting guidance on software and accounted for based on other appropriate
revenue recognition guidance. This guidance must be adopted in the same period
that the company adopts the amended guidance for arrangements with multiple
deliverables described in the preceding paragraph. The adoption of this guidance
did not have an impact on the Companys consolidated financial statements for
the periods presented.
On
July 1, 2010, the Company adopted new FASB guidance on the effect of
denominating the exercise price of a share-based payment award in the currency
of the market in which the underlying equity security trades. This guidance
clarifies that an employee share-based payment award with an exercise price
denominated in the currency of a market in which a substantial portion of the
entitys equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The adoption of this guidance did not have an impact on the Companys
consolidated financial statements for the periods presented.
On
January 1, 2011, the Company adopted new FASB guidance related to disclosure of
supplementary pro forma information for business combinations. The guidance
specifies that if a public entity presents comparative financial statements, the
entity should disclose revenue and earnings of the combined entity as though the
business combination(s) that occurred during the current year had occurred as of
the beginning of the comparable prior annual reporting period only. The guidance
is effective prospectively for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2010. The adoption of this guidance has impacted the
presentation of the Companys pro forma information for the business combination
disclosed in note 3.
In
December 2010, the FASB issued guidance regarding
Step 2 of the goodwill
impairment test for reporting units with zero or negative carrying amounts
.
The guidance modifies Step 1 of the goodwill impairment test for reporting units
with zero or negative carrying amounts and requires the company to perform Step
2 if it is more likely than not that a goodwill impairment may exist. The
guidance is effective for fiscal years and interim periods within those years,
beginning after December 15, 2010. Early adoption is not permitted. The Company
will adopt the authoritative guidance on July 1, 2011 and is currently assessing
the impact on its consolidated financial statements.
F-18
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Recent
accounting pronouncements not yet adopted as of June 30, 2011
In
May 2011, the FASB issued guidance regarding fair value measurement amendments
to achieve common fair value measurement and disclosure requirements in GAAP and
International Financial Reporting Standards (IFRSs). The guidance improves the
comparability of fair value measurements presented and disclosed in accordance
with GAAP and IFRSs by changing the wording used to describe many of the
requirements in GAAP for measuring fair value and disclosure of information. The
amendments to this guidance provide explanations on how to measure fair value
but do not require any additional fair value measurements and do not establish
valuation standards or affect valuation practices outside of financial
reporting. The amendments clarify existing fair value measurements and
disclosure requirements to include application of the highest and best use and
valuation premises concepts; measuring fair value of an instrument classified in
a reporting entitys equity; and disclosures requirements regarding quantitative
information about unobservable inputs categorized within Level 3 of the fair
value hierarchy. In addition, clarification is provided for measuring the fair
value of financial instruments that are managed in a portfolio and the
application of premiums and discounts in a fair value measurement. The guidance
is effective for fiscal years and interim periods within those years, beginning
after December 15, 2010. We do not expect this guidance to have a significant
impact on the Companys consolidated financial statements.
In
June 2011, the FASB issued guidance regarding the presentation of comprehensive
income. The guidance improves the comparability, consistency, and transparency
of financial reporting and increases the prominence of items reported in other
comprehensive income. The amendments to the guidance requires entities to
present the total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. Entities
are no longer permitted to present components of other comprehensive income as
part of the statement of changes in equity. Any adjustments for items that are
reclassified from other comprehensive income to net income are to be presented
on the face of the entities' financial statement regardless of the method of
presentation for comprehensive income. The amendments do not change items to be
reported in comprehensive income or when an item of other comprehensive income
must be reclassified to net income, nor do the amendments change the option to
present the components of other comprehensive income either net of related tax
effects or before related tax effects. This guidance is effective for fiscal
years, and interim periods within those years, beginning on or after December
15, 2011. The Company currently presents its comprehensive income in a single
continuous statement of comprehensive income and therefore the adoption of this
guidance will not impact its presentation of comprehensive income.
3.
ACQUISITIONS
2011
acquisitions
98.73%
of KSNET Inc. (KSNET)
On
October 29, 2010, the Company acquired KSNET for KRW 270 billion (approximately
$240 million based on exchange rates on October 29, 2010), subject to
post-closing working capital adjustment which is still being determined between
the Company and the former shareholders of KSNET. The acquisition of KSNET
expands the Companys international footprint as well as diversifies the
Companys revenue, earnings and product portfolio.
Most
of KSNETs revenue is derived from the provision of payment processing services
to approximately 200,000 merchants and to card issuers in Korea through its VAN.
KSNET has a diverse product offering and the Company believes it is the only
total payments solutions provider offering card VAN, PG and banking VAN services
in Korea, which differentiates KSNET from other Korean payment solution
providers and allows it to cross-sell its products across its customer base.
F-19
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
3.
ACQUISITIONS
(continued)
2011
acquisitions (continued)
98.73%
of KSNET Inc. (KSNET) (continued)
The
following table sets forth the preliminary allocation of the purchase price:
Cash and cash equivalents
|
$
|
10,507
|
|
Accounts receivable, net
|
|
28,748
|
|
Inventory
|
|
2,788
|
|
Current deferred tax assets
|
|
911
|
|
Settlement assets
|
|
13,164
|
|
Long-term receivable
|
|
288
|
|
Property, plant and equipment, net
|
|
24,052
|
|
Goodwill (Note 9)
|
|
120,139
|
|
Intangible assets, net (Note 9)
|
|
102,829
|
|
Other long-term assets
|
|
6,324
|
|
Trade payables
|
|
(9,643
|
)
|
Other payables
|
|
(14,093
|
)
|
Income taxes payable
|
|
(3,363
|
)
|
Settlement obligations
|
|
(13,164
|
)
|
Long-term deferred income tax liabilities
(Note 16)
|
|
(24,459
|
)
|
Other long-term liabilities
|
|
(1,199
|
)
|
Total net assets of KSNET attributable to shareholders, including
goodwill
|
|
243,829
|
|
Less attributable to non-controlling interest
|
|
(3,097
|
)
|
Total purchase price
|
$
|
240,732
|
|
The
preliminary purchase price allocation is based on management estimates as of
June 30, 2011, and may be adjusted up to one year following the closing of the
acquisition. The purchase price allocation has not been finalized, as management
has not yet analyzed in detail the assets acquired and liabilities assumed. The
Company expects to finalize the purchase price allocation on or before September
30, 2011.
The
Company incurred transaction-related expenditures of $5.6 million, respectively,
during the year ended June 30, 2011, related to this acquisition and expects to
incur some additional expenses during the three months ending September 30,
2011. The Company is currently unable to quantify the amount of these additional
expenditures.
The
results of KSNETs operations are reflected in the Companys financial
statements from November 1, 2010. The following unaudited pro forma revenue, net
income and per share information has been prepared as if the acquisition of
KSNET had occurred on July 1, 2009:
|
|
Unaudited
|
|
|
|
Year ended
|
|
|
|
June
30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
375,336
|
|
$
|
342,521
|
|
Net income
|
|
3,261
|
|
|
22,109
|
|
|
|
|
|
|
|
|
Earnings per share basic in United States dollars
|
|
0.07
|
|
|
0.48
|
|
Earnings per share diluted in United
States dollars
|
$
|
0.07
|
|
$
|
0.48
|
|
F-20
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
3.
ACQUISITIONS
(continued)
2011
acquisitions (continued)
98.73%
of KSNET Inc. (KSNET) (continued)
The
unaudited pro forma financial information presented above includes the business
combination accounting and other effects from the acquisition including (1)
amortization expense related to acquired intangibles and the related deferred
tax; (2) the loss of interest income, net of taxation, as a result of funding a
portion of the purchase price in cash; (3) an increase in interest expense
resulting from the long-term borrowing obtained to fund a portion of the
purchase price and (4) an adjustment to exclude all applicable
transaction-related costs recognized in the Companys consolidated statements of
operations for the year ended June 30, 2010. The unaudited pro forma net income
and per share information presented above does not include any cost savings or
other synergies that may result from the acquisition.
The
unaudited pro forma information as presented above is for informational purposes
only and is not indicative of the results of operations that would have been
achieved if the acquisition had occurred on these dates.
Since
the closing of the acquisition, KSNET has contributed revenue of $68.4 million
and a net loss, including transaction-related interest and intangible assets
amortization related to assets acquired, net of deferred taxes, of $4.1 million.
19.9%
of Net1 Universal Electronic Technologies (Austria) AG, formerly BGS Smartcard
Systems AG (Net1 UTA)
On
December 23, 2010, the Company acquired the remaining 19.9% of the issued share
capital of Net 1 Universal Technologies (Austria) AG (Net1 UTA)
for $0.6 million in cash. The Company now owns 100% of Net1 UTA. The transaction
was accounted for as an equity transaction with a non-controlling interest and
accordingly, no gain or loss was recognized in the Companys consolidated
statement of operations. The carrying amount of the non-controlling interest
was adjusted to reflect the change in ownership interest in Net1 UTA. The difference
between the fair value of the consideration paid and the amount by which the
non-controlling interest was adjusted, of $0.9 million, was recognized in equity
attributable to Net1.
2010
Acquisitions
MediKredit
Integrated Healthcare Solutions (Proprietary) Limited (MediKredit)
On
January 1, 2010, the Company acquired 100% of MediKredit, a South African
private company, for ZAR 74 million (approximately $10 million) in cash.
MediKredit offers transaction processing, financial and clinical risk management
solutions to both health care plans and health care service providers, primarily
in South Africa. The Company believes that the acquisition of MediKredit has
increased the depth and diversity of the management team with the addition of
experienced executives, and provides the potential to strengthen its position as
the leading independent transaction processor in South Africa and expand its
offering in some of its existing markets like Ghana and Nigeria, where national
health insurance schemes have been introduced and where the UEPS platform and
installed card base could offer a complete national solution when combined with
the MediKredit system. In addition, MediKredit provides the Company with a
small, strategic entry point for the US healthcare administration market. The
rapidly changing US healthcare and administration industry provides a
significant opportunity for the introduction of MediKredits technology.
Finally, the Company and MediKredit both operate similar back-end systems, which
require skilled developers and technicians and the addition of MediKredit would
significantly broaden the Companys base of qualified development employees.
FIHRST
Management Services (Proprietary) Limited business and related software
(collectively FIHRST)
On
March 31, 2010, the Company acquired FIHRST, a South African business, for ZAR
70 million (approximately $9 million). FIHRST offers a third-party payroll
payments solution to companies in South Africa.
F-21
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
3. ACQUISITIONS (continued)
2010
Acquisitions (continued)
FIHRST
Management Services (Proprietary) Limited business and related software
(collectively FIHRST) (continued)
The
FIHRST acquisition provides the Company with access to employees of FIHRSTs
customers which the Company believes will provide it with the opportunity to
market its range of transaction processing products and financial services,
including bill payments, insurance products, prepaid utilities and third-party
payments to these employees. The Company will have the potential to promote its
wage payment initiative by offering the employees of FIHRST customers its
banking solutions through the Companys relationship with Grindrod Bank.
Finally, the Company and FIHRST operate on different IT platforms, which will
result in additional resources with complementary IT skills. The Company may
also realize IT-related cost synergies in areas such as disaster recovery and
computer maintenance and support.
The
preliminary purchase price allocation of the MediKredit and FIHRST acquisitions,
translated at the foreign exchange rates applicable on the date of acquisition,
are provided in the table below:
|
|
MediKredit
|
|
|
FIHRST
|
|
|
Total
|
|
Cash and cash equivalents
|
$
|
9,005
|
|
$
|
77
|
|
$
|
9,082
|
|
Accounts receivable, net
|
|
2,940
|
|
|
640
|
|
|
3,580
|
|
Property, plant and equipment
|
|
1,290
|
|
|
106
|
|
|
1,396
|
|
Intangible assets (see Note 9)
|
|
6,070
|
|
|
7,983
|
|
|
14,053
|
|
Trade and other payables
|
|
(9,931
|
)
|
|
(337
|
)
|
|
(10,268
|
)
|
Deferred tax assets
|
|
2,718
|
|
|
436
|
|
|
3,154
|
|
Deferred tax liabilities (see
Note 16)
|
|
(2,097
|
)
|
|
(623
|
)
|
|
(2,720
|
)
|
Goodwill (see Note 9)
|
|
-
|
|
|
1,187
|
|
|
1,187
|
|
Total purchase price
|
$
|
9,995
|
|
$
|
9,469
|
|
$
|
19,464
|
|
Pro
forma results of operations have not been presented because the effect of the
MediKredit and FIHRST acquisitions, individually and in the aggregate, were not
material to the Companys consolidated results of operations. During the year
ended June 30, 2010, the Company incurred transaction-related expenditures of
$0.4 million related to these acquisitions. Such expenditures were recognized in
the Companys consolidated statements of operations.
2009
Acquisitions
Net1
UTA
On
August 27, 2008, the Company acquired 80.1% of the issued share capital of Net1
UTA for a total consideration of $101.6 million in cash and the issuance of an
aggregate of 40,134 shares of Net1 common stock to certain former Net1 UTA
shareholders. The Company financed the cash portion of the purchase price with
the proceeds of a short-term bank loan which was repaid in full on October 16,
2008. For practical purposes the acquisition date was set as August 31, 2008.
The
following table sets forth the components of the purchase price for the Net1 UTA
acquisition using exchange rates applicable as of August 31, 2008:
Cash paid to former Net1 UTA shareholders
|
$
|
103,517
|
|
40,134 shares of Net1 common stock valued at $24.46 per
share issued to certain former Net1
|
|
|
|
UTA shareholders
|
|
982
|
|
Costs directly related to the acquisition
|
|
2,915
|
|
Total purchase
price
|
$
|
107,414
|
|
F-22
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
3.
ACQUISITIONS
(continued)
2009
Acquisitions (continued)
Net1
UTA (continued)
The
following table sets forth the allocation of the purchase price:
Cash and cash equivalents
|
$
|
6,283
|
|
Accounts receivable, net
|
|
3,218
|
|
Inventory
|
|
740
|
|
Property, plant and equipment
|
|
350
|
|
Intangible assets (see Note 9)
|
|
68,859
|
|
Trade and other payables
|
|
(7,181
|
)
|
Other long-term liabilities
|
|
(631
|
)
|
Deferred tax assets
|
|
10,657
|
|
Deferred tax liabilities (see Note 16)
|
|
(17,214
|
)
|
Minority interests
|
|
(1,838
|
)
|
Goodwill (see Note 9)
|
|
44,171
|
|
Total purchase price
|
$
|
107,414
|
|
RMT
Systems (Pty) Limited (RMT)
During
the fourth quarter of fiscal 2009, the Company acquired all the stock of RMT, a
South African private company, for a total consideration of $1.4 million in
cash. RMT Systems sells prepaid electricity in the greater Cape Town area in
South Africa. The Company has integrated this offering into its EasyPay
switching offering. The balance sheet, statement of operations and cash flows of
RMT are not significant to the Company.
4.
PRE-FUNDED
SOCIAL WELFARE GRANTS RECEIVABLE
Pre-funded
social welfare grants receivable represents amounts pre-funded by the Company to
certain merchants participating in the merchant acquiring system. The July 2011
payment service commenced during the last four days of June 2011 and was offered
at merchant locations only.
5.
ACCOUNTS
RECEIVABLE, net
|
|
|
2011
|
|
|
|
|
|
2010
|
|
|
Accounts receivable, trade, net
|
$
|
|
42,197
|
|
|
|
$
|
|
31,593
|
|
|
Accounts receivable, trade, gross
|
|
|
42,925
|
|
|
|
|
|
32,400
|
|
|
Allowance for doubtful
accounts receivable, end of year
|
|
|
728
|
|
|
|
|
|
807
|
|
|
Allowance
for doubtful accounts receivable, beginning of year re-measured at year
end rates
|
|
|
902
|
|
|
|
|
|
407
|
|
|
Allowance
reversed to statement of operations, re-measured at year end rates
|
|
|
(47
|
)
|
|
|
|
|
-
|
|
|
Allowance acquired in
acquisitions, re-measured at year end rates
|
|
|
190
|
|
|
|
|
|
75
|
|
|
Allowance
charged to statement of operations, re-measured at year end rates
|
|
|
364
|
|
|
|
|
|
640
|
|
|
Amount utilized,
re-measured at year end rates
|
|
|
(681
|
)
|
|
|
|
|
(315
|
)
|
|
Prepaid establishment costs related to
Grindrod opportunity
|
|
|
175
|
|
|
|
|
|
385
|
|
|
Other receivables
|
|
|
40,408
|
|
|
|
|
|
9,876
|
|
|
Total accounts receivable, net
|
$
|
|
82,780
|
|
|
|
$
|
|
41,854
|
|
|
F-23
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
5.
ACCOUNTS
RECEIVABLE, net (continued)
Receivables
from customers renting POS equipment from the Company are included in accounts
receivable, trade, and are stated net of an allowance for certain amounts that
the Companys management has identified may be unrecoverable. Accounts
receivable, trade, also includes amounts due by customers from the sale of
hardware, software licenses and SIM cards and provision of transaction
processing services. The allowances for credit losses acquired in the KSNET
transactions are presented in the tables above, stated at exchange rates
prevailing at June 30, 2011.
The
Company has a co-operation agreement with Grindrod Bank Limited (Grindrod) for
the establishment of a retail banking division within Grindrod that will focus
on deploying its wage payment solution in South Africa.
Cash
payments to agents in Korea are amortized over the contract period with the
agent. As of June 30, 2011, other receivables includes approximately $16.8
million related to these prepayments.
6.
INVENTORY
The
Companys inventory comprised the following categories as of June 30, 2011 and
2010.
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
24
|
|
$
|
75
|
|
Finished goods
|
|
6,701
|
|
|
3,547
|
|
|
$
|
6,725
|
|
$
|
3,622
|
|
7.
FAIR
VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS
Fair
value of financial instruments
Initial
recognition and measurement
Financial
instruments are recognized when the Company becomes a party to the transaction.
Initial measurements are at cost, which includes transaction costs subsequent to
initial recognition. These instruments are measured as set out below:
Risk
managemen
t
The
Company seeks to reduce its exposure to currencies other than the South African
rand through a policy of matching, to the extent possible, assets and
liabilities denominated in those currencies. In addition, the Company uses
financial instruments in order to economically hedge its exposure to exchange
rate and interest rate fluctuations arising from its operations. The Company is
also exposed to equity price and liquidity risks as well as credit risks.
Currency
exchange risk
The
Company is subject to currency exchange risk because it purchases inventories
that it is required to settle in other currencies, primarily the euro and US
dollar. The Company has used forward contracts in order to limit its exposure in
these transactions to fluctuations in exchange rates between the South African
rand, on the one hand, and the US dollar and the euro, on the other hand.
F-24
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
7.
FAIR
VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Fair
value of financial instruments (continued)
Risk
management (continued)
Currency
exchange risk (continued)
The
Companys outstanding foreign exchange contracts are as follows: As of June 30,
2011 None.
As
of June 30, 2010
|
|
|
|
|
|
Fair market
|
|
|
Notional amount
|
|
Strike price
|
|
value price
|
|
Maturity
|
EUR
|
207,000
|
|
ZAR
|
10.1107
|
|
ZAR
|
9.4802
|
|
July 30, 2010
|
EUR
|
31,200
|
|
ZAR
|
9.5976
|
|
ZAR
|
9.5080
|
|
October 9, 2010
|
Translation
risk
Translation
risk relates to the risk that the Companys results of operations will vary
significantly as the US dollar is its reporting currency, but it earns most of
its revenues and incurs most of its expenses in ZAR. The US dollar to ZAR
exchange rate has fluctuated significantly over the past two years. As exchange
rates are outside the Companys control, there can be no assurance that future
fluctuations will not adversely affect the Companys results of operations and
financial condition.
Interest
rate risk
As
a result of its normal borrowing and leasing activities, the Companys operating
results are exposed to fluctuations in interest rates, which it manages
primarily through regular financing activities. The Company generally maintains
limited investment in cash equivalents and has occasionally invested in
marketable securities.
Credit
risk
Credit
risk relates to the risk of loss that the Company would incur as a result of
non-performance by counterparties. The Company maintains credit risk policies
with regard to its counterparties to minimize overall credit risk. These
policies include an evaluation of a potential counterpartys financial
condition, credit rating, and other credit criteria and risk mitigation tools as
the Companys management deems appropriate.
With
respect to credit risk on financial instruments, the Company maintains a policy
of entering into such transactions only with South African and European
financial institutions that have a credit rating of BBB or better, as determined
by credit rating agencies such as Standard & Poors, Moodys and Fitch
Ratings.
Microlending
credit risk
The
Company was exposed to credit risk in its microlending activities, which
provides unsecured short-term loans to qualifying customers. The Company manages
this risk by assigning each prospective customer a creditworthiness score,
which takes into account a variety of factors such as employment status, salary
earned, other debts and total expenditures on normal household and lifestyle
expenses.
F-25
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
7.
FAIR
VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Fair
value of financial instruments (continued)
Risk
management (continued)
Equity
Price and Liquidity Risk
Equity
price risk relates to the risk of loss that the Company would incur as a result
of the volatility in the exchange-traded price of equity securities that it
holds and the risk that it may not be able to liquidate these securities. On
March 1, 2009, the Company acquired approximately 22% of the issued share
capital of Finbond Group Limited (Finbond), which are exchange-traded equity
securities. The fair value of these securities as of June 30, 2011, represented
approximately 1% of the Companys total assets, including these securities. The
Company expects to hold these securities for an extended period of time and it
is not concerned with short-term equity price volatility with respect to these
securities provided that the underlying business, economic and management
characteristics of the company remain sound. The market price of these
securities may fluctuate for a variety of reasons, consequently, the amount the
Company may obtain in a subsequent sale of these securities may significantly
differ from the reported market value.
Liquidity
risk relates to the risk of loss that the Company would incur as a result of the
lack of liquidity on the exchange on which these securities are listed. The
Company may not be able to sell some or all of these securities at one time, or
over an extended period of time without influencing the exchange traded price,
or at all.
Financial
instruments
Fair
value is defined as the price that would be received upon sale of an asset or
paid upon transfer of a liability in an orderly transaction between market
participants at the measurement date and in the principal or most advantageous
market for that asset or liability. The fair value should be calculated based on
assumptions that market participants would use in pricing the asset or
liability, not on assumptions specific to the entity. In addition, the fair
value of liabilities should include consideration of non-performance risk
including the Companys own credit risk.
Fair
value measurements and inputs are categorized into a fair value hierarchy which
prioritizes the inputs into three levels based on the extent to which inputs
used in measuring fair value are observable in the market. Each fair value
measurement is reported in one of the three levels which is determined by the
lowest level input that is significant to the fair value measurement in its
entirety.
These
levels are:
-
Level 1 inputs are based upon unadjusted quoted prices for identical
instruments traded in active markets.
-
Level 2 inputs are based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which all
significant assumptions are observable in the market or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.
-
Level 3 inputs are generally unobservable and typically reflect
managements estimates of assumptions that market participants would use in
pricing the asset or liability. The fair values are therefore determined using
model-based techniques that include option pricing models, discounted cash
flow models, and similar techniques.
The
following section describes the valuation methodologies the Company uses to
measure financial assets and liabilities at fair value.
F-26
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
7.
FAIR
VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Financial
instruments (continued)
Investments
in common stock
In
general, and where applicable, the Company uses quoted prices in active markets
for identical assets or liabilities to determine fair value. This pricing
methodology would apply to Level 1 investments. If quoted prices in active
markets for identical assets or liabilities are not available to determine fair
value, then the Company uses quoted prices for similar assets and liabilities or
inputs other than the quoted prices that are observable either directly or
indirectly. These investments would be included in Level 2 investments. In
circumstances in which inputs are generally unobservable, values typically
reflect managements estimates of assumptions that market participants would use
in pricing the asset or liability. The fair values are therefore determined
using model-based techniques that include option pricing models, discounted cash
flow models, and similar techniques. Investments valued using such techniques
are included in Level 3 investments.
The
Company's Level 3 asset represents an investment of 84,632,525 shares of common
stock of Finbond. The Companys ownership interest in Finbond as of June 30,
2011, is approximately 22%. The Company has no rights to participate in the
financial, operating, or governance decisions made by Finbond. The Company also
has no participation on Finbonds board of directors whether through contractual
agreement or otherwise. Consequently, the Company has concluded that it does not
have significant influence over Finbond and therefore equity accounting is not
appropriate.
Finbonds
shares are traded on the JSE Limited (JSE) and the Company has designated such
shares as available for sale investments. The Company has concluded that the
market for Finbond shares is not active and consequently has employed
alternative valuation techniques in order to determine the fair value of such
stock. Currently, the operations of Finbond include primarily mortgage brokering
services, property investment and microlending. In determining the fair value of
Finbond, the Company has considered amongst other things Finbonds historical
financial information (including its most recent public accounts), press
releases issued by Finbond and its published net asset value. The Company
believes that the best indicator of fair value of Finbond is its published net
asset value and has used this value to determine the fair value.
Derivative
transactions - Foreign exchange contracts
As
part of the Companys risk management strategy, the Company enters into
derivative transactions to mitigate exposures to foreign currencies using
foreign exchange contracts. These foreign exchange contracts are
over-the-counter customized derivative transactions. Substantially all of the
Companys derivative exposures are with counterparties that have long-term
credit ratings of BBB or better. The Company uses quoted prices in active
markets for similar assets and liabilities to determine fair value. The Company
has no derivatives that require fair value measurement under level 1 or 3 of the
fair value hierarchy.
The
following table presents the Companys assets and liabilities measured at fair
value on a recurring basis as of June 30, 2011 according to the fair value
hierarchy:
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in common
stock (available for sale
assets included in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER LONG-TERM ASSETS)
|
|
-
|
|
$
|
275
|
|
$
|
8,161
|
|
$
|
8,436
|
|
|
Total
assets at fair value
|
|
-
|
|
$
|
275
|
|
$
|
8,161
|
|
$
|
8,436
|
|
F-27
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
7.
FAIR
VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Financial
instruments (continued)
The
following table presents the Companys assets and liabilities measured at fair
value on a recurring basis as of June 30, 2010 according to the fair value
hierarchy:
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in common stock
(available
for sale assets included in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER LONG-TERM ASSETS)
|
|
-
|
|
|
-
|
|
$
|
7,299
|
|
$
|
7,299
|
|
|
Total assets at fair value
|
|
-
|
|
|
-
|
|
$
|
7,299
|
|
$
|
7,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
-
|
|
$
|
17
|
|
|
-
|
|
$
|
17
|
|
|
Total
liabilities at fair value
|
|
-
|
|
$
|
17
|
|
|
-
|
|
$
|
17
|
|
Trade
and other receivables
Trade
and other receivables originated by the Company are stated at cost less
allowance for doubtful debts. The fair value of trade and other receivables
approximate their carrying value due to their short-term nature.
Trade
and other payables
The
fair values of trade and other payables approximates their carrying amounts, due
to their short-term nature.
Assets
and liabilities measured at fair value on a nonrecurring basis
The
Company measures its equity-accounted investments at fair value on a
nonrecurring basis. The Company has no liabilities that are measured at fair
value on a nonrecurring basis. These equity-accounted investments are recognized
at fair value when they are deemed to be other-than-temporarily impaired.
The
Company reviews the carrying values of its investments when events and
circumstances warrant and considers all available evidence in evaluating when
declines in fair value are other-than-temporary. The fair values of the
Companys investments are determined using the best information available, and
may include quoted market prices, market comparables, and discounted cash flow
projections. An impairment charge is recorded when the cost of the investment
exceeds its fair value and the excess is determined to be other-than-temporary.
The Company has not recorded any impairment charges during the reporting periods
presented herein.
F-28
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
7.
FAIR
VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Financial
instruments (continued)
Assets
and liabilities measured at fair value on a nonrecurring basis (continued)
The
Company owns 50% of the ordinary shares in, and loans extended to, each of
SmartSwitch Namibia (Proprietary) Limited (SmartSwitch Namibia) and
SmartSwitch Botswana (Proprietary) Limited (SmartSwitch Botswana). The Company
has determined that each of these entities is a VIE, as the loan to the entity
represents a variable interest but that in each case, the Company is not the
primary beneficiary. Therefore, the Company has not consolidated these entities
and has accounted for these investments using the equity method. The interest
earned by the Company on the loans to each of the entities has been eliminated.
The Company also owns a 37.50% interest in the issued and outstanding ordinary
share capital of VTU De Colombia S.A. (VTU Colombia). In February 2010, the
Companys investment in VTU Colombia was diluted from 50% to 37.50% due to the
admission of a new independent shareholder. In addition, VTU Colombia admitted
another new independent shareholder in April 2011 which has resulting in a
dilution of the Companys investment to approximately 20%. The funds received
from these new shareholders by VTU Colombia were used to fund its continuing
operations.
The
Company sold its 30% interest in the issued and outstanding ordinary share
capital of Vietnam Payment Technologies Joint Stock Company (VinaPay) in April
2011. The Company received gross proceeds of approximately $0.15 million and
recognized a profit on sale of this investment of approximately $0.02 million.
During
the year ended June 30, 2011, SmartSwitch Namibia commenced repaying its
outstanding loans, including outstanding interest. The repayments received have
been allocated to the equity-accounted investments presented in our consolidated
balance sheet as of June 30, 2011, and reduce this balance. The cash inflow from
principal repayments have been allocated to cash flows from investing activities
and the cash inflow from the interest repayments have been included in cash flow
from operating activities in our consolidated statement of cash flows for the
year ended June 30, 2011.
During
the year ended June 30, 2011, SmartSwitch Botswana capitalized all shareholder
loan funding provided and shareholders agreed to waive all interest on these
loans. The net effect of the reversal of the interest and related foreign
exchange effects are included in the Companys consolidated statements of
operations for the year ended June 30, 2011.
In
July 2010, the Company provided additional loan funding of $375,000 for a
specific growth initiative at VTU Colombia. As of June 30, 2011, the Companys
share in VTU Colombias accumulated losses continued to exceed its investment.
VTU Colombias has recently admitted a new shareholder, and the funds received
from this shareholder will be used for continuing operations and the Company has
no obligation to provide any additional funding at this stage.
The
Company has sold hardware, software and/or licenses to SmartSwitch Namibia and
SmartSwitch Botswana and defers recognition of 50% of the net income after tax
related to these sales until SmartSwitch Namibia and SmartSwitch Botswana has
used the purchased asset or has sold it to a third-party. The deferral of the
net income after tax is shown in the Elimination column in the table below.
The
functional currency of the Companys equity-accounted investments is not the US
dollar and thus the investments are translated at the period end US
dollar/foreign currency exchange rate with an entry against accumulated other
comprehensive loss. The functional currency of SmartSwitch Namibia is the
Namibian dollar, the functional currency of SmartSwitch Botswana is the Botswana
pula, the functional currency of VTU Colombia is the Colombian peso and the
functional currency of VinaPay is the Vietnamese dong.
F-29
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
7.
FAIR
VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Financial
instruments (continued
)
Assets
and liabilities measured at fair value on a nonrecurring basis
Summarized
below is the Companys interest in equity-accounted investments as of June 30,
2011 and 2010:
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Loans
|
|
|
(Loss)
|
|
|
Elimination
|
|
|
|
Total
|
|
Balance as of June 30, 2010
|
$
|
3,549
|
|
$
|
2,512
|
|
$
|
(3,905
|
)
|
$
|
442
|
|
|
$
|
2,598
|
|
Loans provided
|
|
-
|
|
|
375
|
|
|
-
|
|
|
-
|
|
|
|
375
|
|
Loan repaid
|
|
|
|
|
(475
|
)
|
|
|
|
|
-
|
|
|
|
(475
|
)
|
Interest repaid
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(292
|
)
|
|
|
(292
|
)
|
Loans converted to equity
|
|
1,015
|
|
|
(1,015
|
)
|
|
-
|
|
|
-
|
|
|
|
-
|
|
(Loss) Earnings from equity-
accounted investments
|
|
-
|
|
|
-
|
|
|
(268
|
)
|
|
(71
|
)
|
|
|
(339
|
)
|
SmartSwitch Namibia
(1)
|
|
-
|
|
|
-
|
|
|
187
|
|
|
70
|
|
|
|
257
|
|
SmartSwitch Botswana
(1)
|
|
-
|
|
|
-
|
|
|
347
|
|
|
(421
|
)
|
|
|
(74
|
)
|
VTU Colombia
(1)
|
|
-
|
|
|
-
|
|
|
(729
|
)
|
|
280
|
|
|
|
(449
|
)
|
VinaPay
(1)
|
|
-
|
|
|
-
|
|
|
(73
|
)
|
|
-
|
|
|
|
(73
|
)
|
Sale of VinaPay
|
|
(579
|
)
|
|
-
|
|
|
443
|
|
|
-
|
|
|
|
136
|
|
Proceeds sale of VinaPay
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
150
|
|
Profit on sale of VinaPay
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
(14
|
)
|
Foreign currency
adjustment
(2)
|
|
66
|
|
|
233
|
|
|
(98
|
)
|
|
(72
|
)
|
|
|
129
|
|
Balance as of June 30, 2011
|
$
|
4,051
|
|
$
|
1,630
|
|
$
|
(3,828
|
)
|
$
|
7
|
|
|
$
|
1,860
|
|
(1)
includes the recognition of realized net
income.
(2)
the foreign currency adjustment represents the effects of the combined net
currency fluctuations between the functional currency of the equity-accounted
investments and the US dollar.
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Loans
|
|
|
(Loss)
|
|
|
Elimination
|
|
|
|
Total
|
|
Balance as of June 30, 2009
|
$
|
3,467
|
|
$
|
2,468
|
|
$
|
(3,451
|
)
|
$
|
99
|
|
|
$
|
2,583
|
|
(Loss) Earnings from equity- accounted
investments
|
|
-
|
|
|
-
|
|
|
(271
|
)
|
|
364
|
|
|
|
93
|
|
SmartSwitch Namibia
(1)
|
|
-
|
|
|
-
|
|
|
40
|
|
|
120
|
|
|
|
160
|
|
SmartSwitch
Botswana
(1)
|
|
-
|
|
|
-
|
|
|
(194
|
)
|
|
244
|
|
|
|
50
|
|
VTU Colombia
(1)
|
|
-
|
|
|
-
|
|
|
24
|
|
|
-
|
|
|
|
24
|
|
VinaPay
(1)
|
|
-
|
|
|
-
|
|
|
(141
|
)
|
|
-
|
|
|
|
(141
|
)
|
Foreign currency
adjustment
(2)
|
|
82
|
|
|
44
|
|
|
(183
|
)
|
|
(21
|
)
|
|
|
(78
|
)
|
Balance as of June 30, 2010
|
$
|
3,549
|
|
$
|
2,512
|
|
$
|
(3,905
|
)
|
$
|
442
|
|
|
$
|
2,598
|
|
(1)
includes the recognition of realized net
income.
(2)
the foreign currency adjustment represents the effects of the combined net
currency fluctuations between the functional currency of the equity-accounted
investments and the US dollar.
F-30
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
8.
PROPERTY,
PLANT AND EQUIPMENT, net
|
|
2011
|
|
|
2010
|
|
Cost:
|
|
|
|
|
|
|
Land
|
$
|
910
|
|
$
|
-
|
|
Building and structures
|
|
499
|
|
|
-
|
|
Computer
equipment
|
|
64,411
|
|
|
25,528
|
|
Furniture and office equipment
|
|
8,297
|
|
|
6,822
|
|
Motor vehicles
|
|
8,824
|
|
|
7,541
|
|
Plant and equipment
|
|
2,873
|
|
|
2,666
|
|
|
|
85,814
|
|
|
42,557
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
Land
|
|
-
|
|
|
-
|
|
Building and structures
|
|
29
|
|
|
-
|
|
Computer
equipment
|
|
33,417
|
|
|
21,482
|
|
Furniture and office equipment
|
|
6,378
|
|
|
5,013
|
|
Motor vehicles
|
|
7,745
|
|
|
6,632
|
|
Plant and equipment
|
|
2,438
|
|
|
2,144
|
|
|
$
|
50,007
|
|
|
35,271
|
|
Carrying amount:
|
|
|
|
|
|
|
Land
|
|
910
|
|
|
-
|
|
Building and structures
|
|
470
|
|
|
-
|
|
Computer
equipment
|
|
30,994
|
|
|
4,046
|
|
Furniture and office equipment
|
|
1,919
|
|
|
1,809
|
|
Motor vehicles
|
|
1,079
|
|
|
909
|
|
Plant and equipment
|
|
435
|
|
|
522
|
|
|
$
|
35,807
|
|
$
|
7,286
|
|
9.
GOODWILL
AND INTANGIBLE ASSETS, net
Goodwill
Summarized
below is the movement in the carrying value of goodwill for the years ended June
30, 2011 and 2010:
|
|
Carrying
|
|
|
|
value
|
|
Balance as of July 1, 2009
|
$
|
116,197
|
|
Acquisitions
(1)
|
|
1,187
|
|
Impairment of goodwill
|
|
(37,378
|
)
|
Foreign currency adjustment
(2)
|
|
(3,660
|
)
|
Balance as of June 30, 2010
|
|
76,346
|
|
Acquisition of KSNET
(3)
|
|
120,139
|
|
Foreign currency adjustment
(2)
|
|
13,085
|
|
Balance as of June 30, 2011
|
$
|
209,570
|
|
(1)
represents goodwill arising from the acquisition of FIHRST and translated at
the foreign exchange rates applicable on the date the transactions became
effective. This goodwill has been allocated to the South African
transaction-based activities operating segment (see Note
3).
(2)
the foreign currency adjustment represents the effects of the fluctuations
between the South African rand and the euro, and the US dollar on the carrying
value.
(3)
represents goodwill arising from the acquisition of KSNET and translated at
the foreign exchange rate applicable on the date the transactions became
effective. This goodwill has been allocated to the international
transaction-based activities operating segment (see Note 3).
Goodwill
associated with the acquisitions of KSNET and FIHRST represents the excess of
cost over the fair value of acquired net assets. The KSNET and FIHRST goodwill
is not deductible for tax purposes. See note 3 for the allocation of the
purchase price to the fair value of acquired net assets.
F-31
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
9.
GOODWILL
AND INTANGIBLE ASSETS, net (continued)
Goodwill
(continued)
The
Company assesses the carrying value of goodwill for impairment annually, or more
frequently, whenever events occur and circumstances change indicating potential
impairment. The Company performs its annual impairment test as at June 30 of
each year. The results of our impairment tests during the year ended June 30,
2011, indicated that the fair value of the Companys reporting units exceeded
their carrying values and therefore the Companys reporting units were not at
risk of potential impairment. During the fourth quarter of 2010 the Company
determined that the carrying value of goodwill of the hardware, software and
related technology sales segment reporting unit exceeded the fair value and, as
a result, recorded an impairment loss of $37.4 million.
In
order to determine the amount of goodwill impairment, the estimated fair value
of the hardware, software and related technology sales segment was allocated to
the individual fair value of the assets and liabilities of the segment as if the
segment had been acquired in a business combination, which resulted in the
implied fair value of the goodwill. The allocation of the fair value required
the Company to make a number of assumptions and estimates about the fair value
of assets and liabilities where the fair values were not readily available or
observable.
A
further deterioration in the hardware, software and related technology sales
segment, or in any other of the Companys businesses, may lead to additional
impairments in future periods.
During
the year ended June 30, 2009, the Company recognized an impairment loss of
approximately $1.8 million on goodwill allocated to the financial services
segment as a result of the deteriorating trading conditions of this segment, the
Companys managements strategic decision not to grow this business and the
offer received for the traditional microlending business in January 2009. On
March 1, 2009, the Company sold all traditional microfinance loans receivables
and goodwill and received shares in Finbond as consideration.
Goodwill
has been allocated to the Companys reportable segments as follows:
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
South African
transaction-based activities
|
$
|
42,005
|
|
$
|
37,568
|
|
International transaction-based activities
|
|
124,895
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and
related technology sales
|
|
42,670
|
|
|
38,778
|
|
Total
|
$
|
209,570
|
|
$
|
76,346
|
|
Intangible
assets, net
Impairment
loss
The
Company assesses the carrying value of intangible assets for impairment whenever
events occur or circumstances change indicating that the carrying amount of the
intangible asset may not be recoverable. During the year ended June 30, 2011,
one of Net1 UTAs largest customers advised the Company of its intention to
transition to an alternative payment platform which will negatively impact the
Companys revenue, net income and cash flow in the medium term. As a consequence
of this development, as well as deteriorating trading conditions and uncertainty
surrounding the timing and quantum of future net cash inflows, the Company
reviewed customer relationships acquired as part of the Net1 UTA acquisition for
impairment. As a result of this review, the Company recognized an impairment
loss of approximately $41.8 million during its third quarter of fiscal 2011
related to the entire carrying value of customer relationships acquired in the
Net1 UTA acquisition in August 2008. In addition, the Company reversed the
deferred tax liability of $10.4 million associated with this intangible
asset.
F-32
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
9.
GOODWILL
AND INTANGIBLE ASSETS, net (continued)
Intangible
assets, net (continued)
Impairment
loss (continued)
The
expected undiscounted future cash flows related to the Net1 UTA customer
relationships was compared to the carrying value of the asset and management
determined that the carrying value exceeded the undiscounted future cash flows.
Accordingly, management performed an asset impairment analysis to determine the
impairment loss. This analysis requires a comparison of the carrying value of
the customer relationships with its fair value. The fair value of the customer
relationships was determined using an income approach valuation technique. The
calculation of the fair value required the Company to make a number of
assumptions and estimates about the fair value of assets and liabilities where
the fair values were not readily available or observable.
The
impairment loss has been allocated to the Companys hardware, software and
related technology sales operating segment.
Intangible
assets acquired
Summarized
below is the fair value of intangible assets acquired, translated at the
exchange rate applicable as of the relevant acquisition dates, and the
weighted-average amortization period:
|
|
|
|
|
Weighted-
|
|
|
|
Fair value
|
|
|
Average
|
|
|
|
as of
|
|
|
Amortization
|
|
|
|
acquisition
|
|
|
period (in
|
|
|
|
date
|
|
|
years)
|
|
Finite-lived intangible
asset:
|
|
|
|
|
|
|
KSNET customer relationships
|
$
|
74,663
|
|
|
10
|
|
FIHRST customer
relationships
|
$
|
1,804
|
|
|
10
|
|
Net1 UTA customer relationships
(1)
|
|
68,859
|
|
|
7
|
|
KSNET software
and unpatented technology
|
|
24,380
|
|
|
5
|
|
FIHRST software and unpatented
technology
|
|
6,179
|
|
|
3
|
|
MediKredit
software and unpatented technology
|
|
5,249
|
|
|
3
|
|
KSNET trademarks
|
$
|
3,786
|
|
|
8
|
|
MediKredit
customer database
|
$
|
821
|
|
|
3
|
|
(1) Impaired during the year ended June
30, 2011
On
acquisition, the Company recognized a deferred tax liability of approximately
$24.5 million related to the acquisition of the KSNET intangible assets during
the year ended June 30, 2011. The Company recognized a deferred tax asset of
approximately $0.4 million related to the acquisition of the FIHRST software and
a deferred tax liability of approximately $2.7 million related to the MediKredit
and the remaining FIHRST intangible assets during the year ended June 30,
2010.
F-33
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
9.
GOODWILL
AND INTANGIBLE ASSETS, net (continued)
Intangible
assets, net (continued)
Summarized
below is the carrying value and accumulated amortization of intangible assets as
of June 30, 2011 and 2010:
|
|
|
As
of June 30, 2011
|
|
|
As
of June 30, 2010
(2)
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships(1)
|
$
|
100,155
|
|
$
|
(15,283
|
)
|
$
|
84,872
|
|
$
|
77,452
|
|
$
|
(22,519
|
)
|
$
|
54,933
|
|
|
Software
and unpatented
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
technology(1)
|
|
37,697
|
|
|
(8,999
|
)
|
|
28,698
|
|
|
11,047
|
|
|
(1,343
|
)
|
|
9,704
|
|
|
FTS patent
|
|
5,598
|
|
|
(5,598
|
)
|
|
-
|
|
|
5,007
|
|
|
(4,880
|
)
|
|
127
|
|
|
Exclusive licenses
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
4,506
|
|
|
(3,941
|
)
|
|
565
|
|
|
Trademarks
|
|
8,130
|
|
|
(2,288
|
)
|
|
5,842
|
|
|
3,766
|
|
|
(1,411
|
)
|
|
2,355
|
|
|
Customer database
|
|
888
|
|
|
(444
|
)
|
|
444
|
|
|
795
|
|
|
(132
|
)
|
|
663
|
|
|
Total finite-lived intangible assets
|
$
|
156,974
|
|
$
|
(37,118
|
)
|
$
|
119,856
|
|
$
|
102,573
|
|
$
|
(34,226
|
)
|
$
|
68,347
|
|
(1) 2011 balances include the customer
relationships, software and unpatented technology and trademarks acquired as
part of the KSNET acquisition in October 2010.
(2) The Net1 UTA customer
relationships that have been impaired are excluded from the June 30, 2011,
balances but included in the June 30, 2010, balances.
Amortization
expense charged for the years to June 30, 2011, 2010 and 2009 was $22.5 million,
$15.2 million, and $13.4 million, respectively.
Future
estimated annual amortization expense for the next five fiscal years, assuming
exchange rates prevailing on June 30, 2011, is presented in the table below.
Actual amortization expense in future periods could differ from this estimate as
a result of acquisitions, changes in useful lives, exchange rate fluctuations
and other relevant factors.
2011
|
$
|
19,568
|
|
2012
|
|
17,918
|
|
2013
|
|
15,155
|
|
2014
|
|
15,155
|
|
2015
|
$
|
11,776
|
|
10.
OTHER
PAYABLES
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Participating merchants settlement
obligation
|
$
|
30,316
|
|
$
|
19,200
|
|
Payroll-related payables
|
|
1,842
|
|
|
1,446
|
|
Accruals
|
|
7,976
|
|
|
7,378
|
|
Value-added tax payable
|
|
3,186
|
|
|
2,160
|
|
Other
|
|
16,238
|
|
|
8,772
|
|
Provisions
|
|
11,707
|
|
|
11,899
|
|
|
$
|
71,265
|
|
$
|
50,855
|
|
F-34
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
11.
SHORT-TERM
FACILITIES
As
of June 30, 2011, the Company had a short-term facility in South African rand of
approximately $36.5 million, translated at exchange rates applicable as of June
30, 2011, with Nedbank Limited (Nedbank). As of June 30, 2011, the overdraft
rate on this facility was 7.85% . Certain of the Companys South African
subsidiaries have provided a cross deed of suretyship whereby each of these
companies has bound itself as surety and co-principal debtor with each other for
the fulfillment of each other's obligations under the facility. These South
African subsidiaries have agreed that any debit and credit bank account balances
with Nedbank may be set off against each other. Certain South African
subsidiaries have ceded trade receivables with an aggregate value of
approximately $20.0 million, translated at exchange rates applicable as of June
30, 2011, as security for the facility as well as the Companys investment in
Cash Paymaster Services (Proprietary) Limited, a wholly owned South African
subsidiary. As of June 30, 2011, the Company had utilized none of its South
African short-term facility.
Management
believes that the Companys current short-term facilities are sufficient in
order to meet its future obligations as they arise.
12.
LONG-TERM
BORROWINGS
The
Company financed a portion of the KSNET acquisition price and related
transaction expenses with the proceeds of a KRW 130.5 billion (approximately
$115.9 million based on October 29, 2010 exchange rates) five-year senior
secured loan facility provided by a consortium of banks under a facilities
agreement (the Facilities Agreement). The Facilities Agreement provides for
three separate facilities: a Facility A loan to the Companys wholly owned
subsidiary, Net1 Applied Technologies Korea (Net1 Korea), of up to KRW 130.5
billion (divided into Facility A1 (KRW 65.5 billion) and Facility A2 (KRW 65.0
billion)) and a Facility B loan to KSNET of up to KRW 65.0 billion. The Facility
B loan, if drawn, must be used to repay the Facility A2 loan and may be borrowed
only if Net1 Korea and KSNET complete a merger transaction with each other.
Interest on the loans is payable quarterly and is based on the Korean CD rate in
effect from time to time plus a margin of 4.10% for Facility A loans and 3.90%
for the Facility B loan. The CD rate was 3.0% on June 30, 2011. Total interest
expense for the year ended June 30, 2011, was $7.5 million, and includes
amortization of facility fees of $2.0 million. Interest of approximately $1.5
million, translated at exchange rates applicable as of June 30, 2011, has been
accrued as of June 30, 2011.
The
Facility A1 loan matures on the fifth anniversary of the initial drawdown with
no required principal prepayments. Principal on the Facility A2 loan and
Facility B loan is repayable in scheduled installments, beginning twelve months
after initial drawdown and thereafter, semi-annually with final maturity
scheduled for 54 months after initial drawdown. The first and second scheduled
installments of approximately $15.0 million, translated at exchange rates
applicable as of June 30, 2011, are due in equal installments of $7.5 million
each, on October 29, 2011 and April 29, 2012, respectively, and have been
classified as current in the Companys consolidated balance sheet. As of June
30, 2011, the carrying amount of the long-term borrowings approximated its fair
value
The
loans are secured by substantially all of KSNETs assets, a pledge by Net1 Korea
of its entire equity interest in KSNET and a pledge by the immediate parent of
Net1 Korea (also one of the Companys subsidiaries) of its entire equity
interest in Net1 Korea. The Facilities Agreement contains customary covenants
that require Net1 Korea and its consolidated subsidiaries to maintain certain
specified financial ratios (including a leverage ratio and a debt service
coverage ratio) and restrict their ability to make certain distributions with
respect to their capital stock, prepay other debt, encumber their assets, incur
additional indebtedness, make capital expenditures above specified levels,
engage in certain business combinations and engage in other corporate
activities. The loans under the Facilities Agreement are without recourse to,
and the covenants and other agreements contained therein do not apply to, the
Company or any of the Companys subsidiaries (other than Net1 Korea and its
subsidiaries, including KSNET).
13.
COMMON
STOCK
The
Companys balance sheet as of June 30, 2011 and 2010, respectively, reflects one
class of equity, namely common stock. From fiscal 2004 to fiscal 2008 the
Companys balance sheet reflected two classes of equity - common stock and
linked units. The linked units were created in June 2004 in connection with the
acquisition of Net 1 Applied Technology Holdings Limited (Aplitec). Effective
October 2008, the linked units (which included a right to Net1 special
convertible preferred stock as well as B Class preference shares and B Class
loans of a Net1 subsidiary) were all converted to common stock as a result of
the listing of Net1s common stock on the JSE and the linked units no longer
exist.
F-35
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
13.
COMMON
STOCK (continued)
Common
stock
Holders
of shares of Net1s common stock are entitled to receive dividends and other
distributions when declared by Net1s board of directors out of funds available.
Payment of dividends and distributions is subject to certain restrictions under
the Florida Business Corporation Act, including the requirement that after
making any distribution Net1 must be able to meet its debts as they become due
in the usual course of its business.
Upon
voluntary or involuntary liquidation, dissolution or winding up of Net1, holders
of common stock share ratably in the assets remaining after payments to
creditors and provision for the preference of any preferred stock according to
its terms. There are no pre-emptive or other subscription rights, conversion
rights or redemption or scheduled installment payment provisions relating to
shares of common stock. All of the outstanding shares of common stock are fully
paid and non-assessable.
Each
holder of common stock is entitled to one vote per share for the election of
directors and for all other matters to be voted on by shareholders. Holders of
common stock may not cumulate their votes in the election of directors, and are
entitled to share equally and ratably in the dividends that may be declared by
the board of directors, but only after payment of dividends required to be paid
on outstanding shares of preferred stock according to its terms. The shares of
Net1 common stock are not subject to redemption.
Common
stock repurchases
In
February 2010 and in May 2010, the Companys Board of Directors authorized the
repurchase of up to $50 million of the Company's common stock, for a total of
$100 million. The authorization does not have an expiration date.
The
share repurchase authorization will be used at managements discretion, subject
to limitations imposed by SEC Rule 10b-18 and other legal requirements and
subject to price and other internal limitations established by the Board.
Repurchases will be funded from the Companys available cash. Share repurchases
may be made through open market purchases, privately negotiated transactions, or
both. There can be no assurance that the Company will purchase any shares or any
particular number of shares.
The
authorization may be suspended, terminated or modified at any time for any
reason, including market conditions, the cost of repurchasing shares, liquidity
and other factors that management deems appropriate. The Company repurchased
125,392 shares during the year ended June 30, 2011, for approximately $1.0
million. The Company did not repurchase any of its shares during the year ended
June 30, 2010 under this authorization.
On
July 28, 2009, the Company repurchased an aggregate of 9,221,526 shares of its
common stock from two shareholders, who originally acquired their shares in
connection with the Aplitec transaction. The purchase price was $13.50 (ZAR
105.98) per share and was paid from the Companys cash reserves in ZAR for an
aggregate purchase price of $124.5 million (ZAR 977.3 million).
In
November 2008, the Companys board approved the repurchase of up to $50 million
of common stock. The Company repurchased 3,621,247 shares during the year ended
June 30, 2009, for approximately $40.7 million.
14.
REVENUE
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Sale of goods comprising mainly hardware
and software sales
|
$
|
30,130
|
|
$
|
36,228
|
|
$
|
47,003
|
|
Loan-based interest and fees received
|
|
7,276
|
|
|
4,214
|
|
|
5,659
|
|
Services rendered comprising mainly fees
and commissions and
contract
variation
fees
|
|
306,014
|
|
|
239,922
|
|
|
194,160
|
|
|
$
|
343,420
|
|
$
|
280,364
|
|
$
|
246,822
|
|
During
the years ended June 30, 2011, 2010 and 2009, the Company did not recognize any
revenue using the percentage of completion method.
F-36
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
15.
STOCK-BASED
COMPENSATION
Amended
and Restated Stock Incentive Plan
The
Companys Amended and Restated Stock Incentive Plan (the Plan) has been
approved by its shareholders. No evergreen provisions are included in the Plan.
This means that the maximum number of shares issuable under the Plan is fixed
and cannot be increased without shareholder approval, the plan expires by its
terms upon a specified date, and no new stock options are awarded automatically
upon exercise of an outstanding stock option. Shareholder approval is required
for the repricing of awards or the implementation of any award exchange program.
The Plan permits Net1 to grant to its employees, directors and consultants
incentive stock options, nonqualified stock options, stock appreciation rights,
restricted stock, performance-based awards and other awards based on its common
stock. The Remuneration Committee of the Companys Board of Directors
(Remuneration Committee) administers the Plan.
The
total number of shares of common stock issuable under the Plan is 8,552,580. The
maximum number of shares for which awards, other than performance-based awards,
may be granted in any combination during a calendar year to any participant is
569,120. The maximum limits on performance-based awards that any participant may
be granted during a calendar year are 569,120 shares subject to stock option
awards and $20 million with respect to awards other than stock options. Shares
that are subject to awards which terminate or lapse without the payment of
consideration may be granted again under the Plan. Shares delivered to the
Company as part or full payment for the exercise of an option or to satisfy
withholding obligations upon the exercise of an option may be granted again
under the Plan in the Remuneration Committees discretion. No awards may be
granted under the Plan after June 7, 2019, but awards granted on or before such
date may extend to later dates.
Options
General
Terms of Awards
Option
awards are generally granted with an exercise price equal to the market price of
the Company's stock at the date of grant, with vesting conditioned upon the
recipients continuous service through the applicable vesting date and expire 10
years after the date of grant. The options generally become exercisable in
accordance with a vesting schedule ratably over a period of five years from the
date of grant. The Company issues new shares to satisfy stock option award
exercises but may also use treasury shares.
Valuation
Assumptions
The
fair value of each option is estimated on the date of grant using the Cox Ross
Rubinstein binomial model that uses the assumptions noted in the following
table. The estimated expected volatility is calculated based on the volatilities
of similar listed companies within the payment processing industry. The Company
has estimated no forfeitures for options award in 2011. The Company has
estimated an annual forfeiture rate of 7.50% for options granted in 2009 based
on historic employee behavior under similar awards granted pursuant to the Plan.
No stock options were granted during the year ended June 30, 2010. The table
below presents the range of assumptions used to value options granted during the
years ended June 30, 2011 and 2009:
|
2011
|
|
2009
|
Expected volatility
|
35%
|
|
30 45%
|
Expected dividends
|
0%
|
|
0%
|
Expected life (in years)
|
3
|
|
2 6
|
Risk-free rate
|
2.0%
|
|
2.0 4.5%
|
Restricted
Stock
General
Terms of Awards
Shares
of restricted stock are considered to be non-vested equity shares. Restricted
stock generally vests ratably over a three year period, with vesting conditioned
upon the recipients continuous service through the applicable vesting date and
under certain circumstances, the achievement of certain performance targets, as
described below.
F-37
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
15.
STOCK-BASED COMPENSATION (continued)
Amended
and Restated Stock Incentive Plan (continued)
Restricted
Stock (continued)
General
Terms of Awards (continued)
Restricted
stock awarded to non-employee directors of the Company vests ratably over a
three year period. In addition, for awards in 2009, until 11 months after the
restricted stock become vested and nonforfeitable, the shares may not be sold,
assigned, transferred, pledged, hypothecated, exchanged, or disposed of in any
way (whether by operation of law or otherwise). If a recipient ceases to be a
member of the Board of Directors for any reason, all shares of his restricted
stock that are not then vested and nonforfeitable will be immediately forfeited
and transferred to the Company for no consideration.
The
Company issues new shares to satisfy restricted stock awards.
Valuation
Assumptions
The
fair value of restricted stock is based on the closing price of the Companys
stock quoted on The Nasdaq Global Select Market on the date of grant.
Performance
Conditions - Restricted Stock Granted in August 2007
In
August 2007, the Remuneration Committee approved an award of 591,500 shares of
restricted stock to executive officers and other employees of the Company.
The
awards provided for vesting of one-third of the award shares on each of
September 1, 2009, 2010 and 2011, conditioned upon each recipients continuous
service through the applicable vesting date and the Company achieving the
financial performance target for that vesting date. Specifically, the financial
performance targets were a 20% increase, compounded annually, in fundamental
diluted earnings per share (expressed in South African rand) (2007 Fundamental
EPS) above Fundamental EPS for the fiscal year ended June 30, 2007. For award
shares vesting prior to September 1, 2009, the annual required increase in the
case of Dr. Belamant and Mr. Kotze was 25% rather than 20%. On November 5, 2009,
the Companys board of directors, on the recommendation of the Remuneration
Committee, determined that the annual required target for Dr. Belamant and Mr.
Kotze be 20%, effective immediately, to be consistent with the terms of the
restricted stock awards granted to other employees. There were no other
amendments to the terms of the restricted stock awards. For the purpose of the
award, 2007 Fundamental EPS was calculated by adjusting GAAP diluted earnings
per share (as reflected in the Companys audited consolidated financial
statements) to exclude the effects related to the amortization of intangible
assets, stock-based compensation charges, one-time, large, unusual expenses as
determined at the discretion of the Remuneration Committee, and assuming a
constant tax rate of 30%. If Fundamental EPS for the specified fiscal year did
not equal or exceed the 2007 Fundamental EPS target for such year, no award
shares would become vested or nonforfeitable on the corresponding vesting date
but would be available to become vested and nonforfeitable as of a subsequent
vesting date if the 2007 Fundamental EPS target for a subsequent fiscal year
were met; provided that the recipients service continued through such
subsequent vesting date. Any outstanding award shares that had not become vested
and nonforfeitable as of September 1, 2011, would be forfeited by the recipient
on September 1, 2011, and transferred to the Company for no consideration.
The
first two tranches of this award vested on September 1, 2009 and 2010, for
employees that continued to provide the requisite service as the financial
performance targets were met. The third tranche will not vest because the
financial performance target was not met. Refer also Stock option and
restricted stock activityrestricted stock below
.
F-38
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
15.
STOCK-BASED
COMPENSATION (continued)
Amended
and Restated Stock Incentive Plan (continued)
Restricted
Stock (continued)
Performance
Conditions - Restricted Stock Granted in October and November 2010
In
October 2010, the Remuneration Committee approved an award of 60,000 shares of
restricted stock to an employee of the Company.
Under
the terms of the award, the shares would vest on June 30, 2014, conditioned upon
the employees continuous service through June 30, 2014, and on the employee
receiving an incremental incentive bonus, as defined in the employees
employment agreement for each of the periods ended June 30, 2011, 2012, 2013 and
2014. Any outstanding award shares that had not become vested and nonforfeitable
as of June 30, 2014, would be forfeited by the recipient on June 30, 2014, and
transferred to the Company for no consideration.
The
October 2010 restricted stock award did not vest because the financial
performance target was not met for June 30, 2011. Refer also Stock option and
restricted stock activityrestricted stock below
.
In
November 2010, the Remuneration Committee approved an award of 83,000 shares of
restricted stock to two of the Companys executive officers.
The
awards provide for vesting of one-third of the award shares on each of November
10, 2011, 2012 and 2013, conditioned upon each recipients continuous service
through the applicable vesting date and the Company achieving the financial
performance target for that vesting date. Specifically, the financial
performance targets is Fundamental EPS, as defined below, of $1.44, $1.60 and
$1.90 for the years ended June 30, 2011, 2012 and 2013, respectively. For the
purpose of the restricted stock granted in November 2010, Fundamental EPS is
calculated as Companys diluted earnings per share as reflected in the Companys
consolidated financial statements, measured in U.S. dollars and determined in
accordance with GAAP, adjusted to exclude the effects related to the
amortization of intangible assets and acquisition-related costs, stock-based
compensation charges, foreign exchange gains and losses arising from foreign
currency hedging transactions, and other items that the Committee may determine
in its discretion to be appropriate (for example, accounting changes and
one-time or unusual items), and assumes a constant tax rate equal to the
Companys effective tax rate for the year ended June 30, 2010. If Fundamental
EPS for the specified fiscal year does not equal or exceed the Fundamental EPS
target for such year, no award shares will become vested or nonforfeitable on
the corresponding vesting date but are available to become vested and
nonforfeitable as of a subsequent vesting date if the Fundamental EPS target for
a subsequent fiscal year is met; provided that the recipients service continues
through such subsequent vesting date. Any outstanding award shares that have not
become vested and nonforfeitable as of November 10, 2013, will be forfeited by
the recipient on November 10, 2013, and transferred to the Company for no
consideration.
Stock
Appreciation Rights
The
Remuneration Committee also may grant stock appreciation rights, either singly
or in tandem with underlying stock options. Stock appreciation rights entitle
the holder upon exercise to receive an amount in any combination of cash or
shares of common stock (as determined by the Remuneration Committee) equal in
value to the excess of the fair market value of the shares covered by the right
over the grant price. No stock appreciation rights have been granted.
F-39
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
15.
STOCK-BASED
COMPENSATION (continued)
Stock
option and restricted stock activity
Options
The
following table summarizes stock option activity for the years ended June 30,
2011, 2010 and 2009:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
Grant
|
|
|
|
|
|
|
|
average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Date Fair
|
|
|
|
|
Number of
|
|
|
exercise
|
|
|
Term
|
|
|
Value
|
|
|
Value
|
|
|
|
|
shares
|
|
|
price
|
|
|
(in years)
|
|
|
($000)
|
|
|
($000)
|
|
|
Outstanding July 1, 2008
|
|
953,378
|
|
$
|
18.20
|
|
|
7.40
|
|
|
5,813
|
|
|
-
|
|
|
Options granted under Plan
|
|
1,120,000
|
|
|
18.81
|
|
|
10.00
|
|
|
-
|
|
$
|
5,786
|
|
|
Exercised
|
|
(84,414
|
)
|
$
|
3.00
|
|
|
-
|
|
|
1,731
|
|
|
-
|
|
|
Forfeitures
|
|
(91,970
|
)
|
$
|
22.51
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Outstanding June 30, 2009
|
|
1,896,994
|
|
|
19.03
|
|
|
8.30
|
|
|
1,576
|
|
|
-
|
|
|
Exercised
|
|
(83,338
|
)
|
$
|
3.00
|
|
|
-
|
|
|
1,667
|
|
|
-
|
|
|
Outstanding June 30, 2010
|
|
1,813,656
|
|
|
19.76
|
|
|
7.41
|
|
|
585
|
|
|
-
|
|
|
Options granted under Plan
|
|
307,000
|
|
|
10.59
|
|
|
10.00
|
|
|
-
|
|
$
|
801
|
|
|
Outstanding June 30, 2011
|
|
2,120,656
|
|
$
|
18.44
|
|
|
6.82
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
1,253,656
|
|
$
|
20.70
|
|
|
5.90
|
|
|
243
|
|
|
|
|
During
each of the years ended June 30, 2011, 2010 and 2009, approximately 380,000,
374,000 and 264,000, stock options became exercisable, respectively.
During
the years ended June 30, 2011, 2010 and 2009, respectively, the Company received
approximately $0.0 million, $0.7 million and $0.3 million from stock option
exercises and approximately $0, $0 and $0.003 million from repayment of stock
option-related loans.
Restricted
stock
The
following table summarizes restricted stock activity for the years ended June
30, 2011, 2010 and 2009:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares of
|
|
|
Grant Date
|
|
|
|
Restricted
|
|
|
Fair Value
|
|
|
|
Stock
|
|
|
($000)
|
|
Non-vested July 1, 2008
|
|
594,782
|
|
|
-
|
|
Granted August
2008
|
|
3,474
|
|
|
85
|
|
Vested
|
|
(1,094
|
)
|
|
19
|
|
Non-vested June 30, 2009
|
|
597,162
|
|
|
-
|
|
Granted August 2009
|
|
10,098
|
|
|
185
|
|
Vested
|
|
(199,432
|
)
|
|
3,800
|
|
Non-vested June 30, 2010
|
|
407,828
|
|
|
-
|
|
Granted August
2010
|
|
13,956
|
|
|
185
|
|
Granted October 2010
|
|
60,000
|
|
|
740
|
|
Granted November
2010
|
|
83,000
|
|
|
879
|
|
Vested
|
|
(203,956
|
)
|
|
2,267
|
|
Awards not vesting
|
|
(257,156
|
)
|
|
-
|
|
Non-vested June 30, 2011
|
|
103,672
|
|
|
|
|
F-40
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
15.
STOCK-BASED
COMPENSATION (continued)
Stock
option and restricted stock activity (continued)
Restricted
stock (continued)
The
fair value of restricted stock vested during the year ended June 30, 2011, 2010
and 2009, was $2.3 million, $3.8 million and $0.02 million, respectively.
The
third tranche of 197,156 shares of restricted stock granted in August 2007 to
executive officers and other employees of the Company and 60,000 shares granted
to an employee of the Company in October 2010 will not vest because the agreed
performance target will not be achieved. The Company has recorded a reversal of
the compensation charge related to August 2007 and October 2010 restricted stock
of $3.4 million and $0.09 million, respectively, during the year ended June 30,
2011. These 257,156 shares of restricted stock will be returned to the Company
and, in accordance with the Plan, are available for future issuances by the
Remuneration Committee.
Stock-based
compensation charge and unrecognized compensation cost
The
Company has recorded a net stock compensation charge of $1.7 million, $5.7
million and $5.0 million for the year ended June 30, 2011, 2010 and 2009,
respectively, which comprised:
|
|
|
|
|
|
Allocated to
|
|
|
|
|
|
|
|
|
|
|
cost of goods
|
|
|
|
|
|
|
|
|
|
|
sold,
IT
|
|
|
Allocated to
|
|
|
|
|
Total
|
|
|
processing,
|
|
|
selling,
|
|
|
|
|
charge
|
|
|
servicing
|
|
|
general and
|
|
|
|
|
(reversal)
|
|
|
and support
|
|
|
administration
|
|
|
Year ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation charge
|
$
|
5,212
|
|
|
193
|
|
|
5,019
|
|
|
Reversal of stock
compensation charge related to August
2007
and October 2010
restricted stock that did not vest
|
|
(3,492
|
)
|
|
-
|
|
|
(3,492
|
)
|
|
Total year ended June 30, 2011
|
$
|
1,720
|
|
$
|
193
|
|
$
|
1,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
5,670
|
|
$
|
202
|
|
$
|
5,468
|
|
|
Total year ended June 30, 2010
|
$
|
5,670
|
|
$
|
202
|
|
$
|
5,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
5,239
|
|
$
|
240
|
|
$
|
4,999
|
|
|
Reversal
of stock compensation charge related to options forfeited
|
|
(213
|
)
|
|
(109
|
)
|
|
(104
|
)
|
|
Total year ended June 30, 2009
|
$
|
5,026
|
|
$
|
131
|
|
$
|
4,895
|
|
The
stock compensation charge and reversals have been allocated to cost of goods
sold, IT processing, servicing and support and selling, general and
administration based on the allocation of the cash compensation paid to the
employees.
As
of June 30, 2011, the total unrecognized compensation cost related to stock
options was approximately $1.4 million, which the Company expects to recognize
over approximately three years. As of June 30, 2011, the total unrecognized
compensation cost related to restricted stock awards was approximately $0.9
million, which the Company expects to recognize over approximately two years.
F-41
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
15.
STOCK-BASED
COMPENSATION (continued)
Tax
consequences
There
are no tax consequences related to options and restricted stock granted to
employees of Company subsidiaries incorporated in South Africa, Austria and
Russia. The Company has recorded a deferred tax asset of approximately $0.8
million and $0.7 million, respectively, for the years ended June 30, 2011 and
2010, related to the stock-based compensation charge recognized related to
employees of Net1 as it is able to deduct the difference between the market
value on date of exercise by the option recipient and the exercise price from
income subject to taxation in the United States.
16.
INCOME TAXES
Income
tax provision
The
table below presents the components of income before income taxes as of June 30,
2011, 2010 and 2009:
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South Africa
|
$
|
108,349
|
|
$
|
136,197
|
|
$
|
143,680
|
|
|
United States
|
|
(15,053
|
)
|
|
(6,909
|
)
|
|
(31,048
|
)
|
|
Other
|
|
(56,886
|
)
|
|
(50,408
|
)
|
|
18,288
|
|
|
Income before income taxes
|
$
|
36,410
|
|
$
|
78,880
|
|
$
|
130,920
|
|
Presented
below is the provision for income taxes by location of the taxing jurisdiction
for each of the years ended June 30:
|
|
|
2011
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax
|
$
|
117,141
|
|
|
$
|
109,669
|
|
|
$
|
83,756
|
|
|
South Africa
|
|
38,882
|
|
|
|
47,225
|
|
|
|
50,092
|
|
|
United States
|
|
77,085
|
|
|
|
62,443
|
|
|
|
33,009
|
|
|
Other
|
|
1,174
|
|
|
|
1
|
|
|
|
655
|
|
|
Deferred taxation (benefit) charge
|
|
(4,862
|
)
|
|
|
(2,770
|
)
|
|
|
(1,460
|
)
|
|
South Africa
|
|
(776
|
)
|
|
|
(441
|
)
|
|
|
(916
|
)
|
|
United States
|
|
2,306
|
|
|
|
(1,236
|
)
|
|
|
928
|
|
|
Other
|
|
(6,392
|
)
|
|
|
(1,093
|
)
|
|
|
(1,472
|
)
|
|
Change in tax rate
|
|
-
|
|
|
|
-
|
|
|
|
(3,003
|
)
|
|
Foreign tax credits generated United States
|
|
(78,754
|
)
|
|
|
(66,077
|
)
|
|
|
(36,549
|
)
|
|
Income tax provision
|
$
|
33,525
|
|
|
$
|
40,822
|
|
|
$
|
42,744
|
|
A
reconciliation of income taxes, calculated at the fully-distributed South African
income tax rate to the Companys effective tax rate, for the years ended
June 30, 2011, 2010 and 2009 is as follows:
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Income tax rate reconciliation
|
|
|
|
|
|
|
|
|
|
|
Income taxes at fully-distributed South African tax rates
|
|
34.55%
|
|
|
34.55%
|
|
|
34.55%
|
|
|
Permanent items
|
|
12.39%
|
|
|
21.69%
|
|
|
1.60%
|
|
|
Foreign tax credits
|
|
(209.00)%
|
|
|
(82.70)%
|
|
|
(40.09)%
|
|
|
Taxation on deemed dividends in the United
States
|
|
217.52%
|
|
|
85.60%
|
|
|
41.58%
|
|
|
Movement in valuation allowance
|
|
34.01%
|
|
|
(5.02)%
|
|
|
(0.41)%
|
|
|
Prior year adjustments
|
|
2.61%
|
|
|
(2.37)%
|
|
|
(2.28)%
|
|
|
Change in tax rate
|
|
-%
|
|
|
-%
|
|
|
(2.29)%
|
|
|
Income tax provision
|
|
92.08%
|
|
|
51.75%
|
|
|
32.66%
|
|
F-42
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
16.
INCOME
TAXES (continued)
Income
tax provision (continued)
There
were no changes to the enacted tax rate in the year ended June 30, 2011 and
2010. On July 22, 2008 a change in the corporate rate of taxation for South
African companies was promulgated reducing the enacted tax rate to 34.55% for
the year ended June 30, 2009. STC is expected to be replaced by a dividend
withholding tax during calendar 2011 as announced by the South African Minister
of Finance during calendar 2009.
The
permanent items during the years ended June 30, 2011 relates principally to
interest expense and transaction-related expenditure which is not deductible for
tax purposes. The permanent items during the years ended June 30, 2010 relates
principally to a goodwill impairment which is not deductible for tax purposes.
The
movement in valuation allowance includes a valuation allowance created for
foreign tax credits and the Net1 UTA valuation allowances created related to its
license ruling, tax deductible goodwill, and net operating loss carryforwards.
Net1
included actual and deemed dividends received from New Aplitec in its year ended
June 30, 2011, 2010 and 2009, taxation computation. Net1 applied net operating
losses against this income. Net1 generated foreign tax credits as a result of
the inclusion of the dividends in its taxable income. Net1 has applied certain
of these foreign tax credits against its current income tax provision for the
year ended June 30, 2011, 2010 and 2009.
Deferred
tax assets and liabilities
Deferred
income taxes reflect the temporary differences between the amounts at which
assets and liabilities are recorded for financial reporting purposes and the
amounts utilized for tax purposes. The primary components of the temporary
differences that gave rise to the Companys deferred tax assets and liabilities
as at June 30, and their classification, were as follows:
|
|
2011
|
|
|
2010
|
|
Total deferred tax
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
$
|
10,696
|
|
$
|
7,376
|
|
Provisions
and accruals
|
|
2,715
|
|
|
2,340
|
|
FTS patent
|
|
1,831
|
|
|
1,764
|
|
Intangible
assets
|
|
22,338
|
|
|
20,728
|
|
Foreign tax credits
|
|
22,566
|
|
|
16,278
|
|
Other
|
|
4,785
|
|
|
2,297
|
|
Total deferred tax assets before valuation
allowance
|
|
64,931
|
|
|
50,783
|
|
Valuation allowances
|
|
(45,866
|
)
|
|
(26,412
|
)
|
Total
deferred tax assets, net of valuation allowance
|
$
|
19,065
|
|
$
|
24,371
|
|
|
|
2011
|
|
|
2010
|
|
Total deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
$
|
29,307
|
|
$
|
17,614
|
|
STC
liability, net of STC credits
|
|
24,380
|
|
|
28,998
|
|
Other
|
|
2,281
|
|
|
287
|
|
Total
deferred tax liabilities
|
|
55,968
|
|
|
46,899
|
|
|
|
|
|
|
|
|
Reported as
|
|
|
|
|
|
|
Current deferred tax assets
|
|
15,882
|
|
|
16,330
|
|
Long
term deferred tax liabilities
|
|
52,785
|
|
|
38,858
|
|
Net
deferred income tax liabilities
|
$
|
36,903
|
|
$
|
22,528
|
|
F-43
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
16.
INCOME
TAXES (continued)
Deferred
tax assets and liabilities (continued)
Increase
in total deferred tax assets net operating loss carryforwards
Included
in total deferred tax assets net operating loss carryforwards are net
operating losses generated by MediKredit of $4.4 million. MediKredit net
operating losses increased by $0.6 million during the year ended June 30, 2011,
and a valuation allowance has been created against this amount. Net operating
loss carryforwards also includes $4.5 million related to Net1 UTA, which
includes $2.5 million related to the tax deductible goodwill discussion below
under Decrease in total deferred tax assets intangible assets Goodwill
deferred tax asset. A valuation allowance has been created for the full amount
of the Net1 UTA net operating losses.
Increase
in total deferred tax assets intangible assets
The
increase in deferred tax assets intangible assets as of June 30, 2011, is due
to the weakening of the US dollar against the euro. The underlying euro balances
were lower as of June 30, 2011, compared with June 30, 2010.
License
ruling
Included
in total deferred tax assets intangible assets as of June 30, 2011, is an
intangible asset related to license rights in Net1 UTA. These license rights are
termed software for Austrian tax purposes and were valued for Austrian tax
purposes based on previous license payments at €50.76 million in June 2006. The
Company expects to amortize the license rights in its tax returns over a period
of 15 years. Any unused amounts are not carried forward to the subsequent year
of assessment. During the years ended June 30, 2011 and 2010, Net1 UTA utilized
approximately $0.2 million and $0.8 million, respectively, of these license
rights against its taxable income and in 2011and 2010, respectively, expensed
$1.2 million and $0.8 million of the unutilized deferred tax asset. In addition,
during the years ended June 30, 2011 and 2010, respectively, the Company
provided an additional valuation allowance of $2.7 million and $0.5 million
against this deferred tax asset. As of June 30, 2011, the gross carrying value
of this deferred tax asset is approximately $12.2 million which has been fully
provided for.
Goodwill
deferred tax asset
Net1
Applied Technologies Austria GmbH (Net1Austria) generated tax deductible
goodwill related to the acquisition of Net1 UTA in August 2008 and under
Austrian tax law Net1Austria can deduct up to 50% of the goodwill recognized, as
defined under Austrian tax law, over a period of 15 years. Unused amounts are
carried forward to subsequent years of assessment and are included in net
operating loss carryforwards. During the year ended June 30, 2011, the Company
provided an additional valuation allowance for the goodwill deferred tax asset
of approximately $1.7 million. As of June 30, 2011, the gross value of this
goodwill deferred tax asset was approximately $9.9 million which has been fully
provided for. As of June 30, 2010, the gross value of this goodwill deferred tax
asset was approximately $9.1 million and the net amount was $2.1 million. The
Company did not utilize the goodwill deferred tax asset during the year ended
June 30, 2011, and the movement in the net balance from $2.1 million to $0 is
due to the valuation allowance provided and the reclassification of
1/15
th
, or $0.8 million, of the asset from goodwill deferred tax
asset to net operating loss carryforward.
The
Company did not utilize any of the net operating loss carryforwards during the
years ended June 30, 2011 and 2010, respectively. During the year ended June
30, 2011, the Company provided a valuation allowance for the goodwill deferred
tax asset net operating loss carryforwards of approximately $2.5 million. As
of June 30, 2011, the gross value of the net operating loss carryforwards was
approximately $2.5 million and the net value was $0. As of June 30, 2010, the
gross and net value of the net operating loss carryforwards was approximately
$1.4 million.
Increase
in total deferred tax liabilities intangible assets
Deferred
tax liabilities intangible assets have increased during the year ended June
30, 2011, primarily as a result of the acquisition of KSNET intangible assets
during the year. This increase in intangible asset related deferred tax
liabilities has been partially offset by the reversal of deferred tax
liabilities of $10.4 million resulting from the impairment of Net1 UTA
intangible assets during the year ended June 30, 2011 as discussed in note 9.
F-44
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
16.
INCOME TAXES (continued)
Deferred
tax assets and liabilities (continued)
Decrease
in total deferred tax liabilities STC liability, net of STC credits
Deferred
tax liabilities STC liability, net of STC credits have decreased during the
year ended June 30, 2011, primarily as a result of payments of STC during the
year resulting from the distribution of dividends by New Aplitec exceeding the
STC liability recognized during the year resulting from net income generated by
the Companys South African subsidiaries.
Valuation
allowance
At
June 30, 2011, the Company had deferred tax assets of $19.1 million (2010: $24.4
million), net of the valuation allowance. Management believes, based on the
weight of available positive and negative evidence it is more likely than not
that the Company will realize the benefits of these deductible differences, net
of the valuation allowance. However, the amount of the deferred tax asset
considered realizable could be adjusted in the future if estimates of taxable
income are revised.
At
June 30, 2011, the Company had a valuation allowance of $45.9 million (2010:
$31.9 million) to reduce its deferred tax assets to estimated realizable value.
The valuation allowances at June 30, 2011 and 2010, relate to intangible assets
including tax deductible goodwill (2011: $22.1 million, 2010: $15.8 million);
foreign tax credits (2011: $14.3 million, 2010: $12.6 million); net operating
loss carryforwards (2011: $8.1 million, 2010: $3.2 million) and the FTS patent
(2011: $1.1 million, 2010: $0.4 million).
Net
operating loss carryforwards and foreign tax credits
United
States
As
of June 30, 2011, Net1 had net operating loss carryforwards that will expire, if
unused, as follows:
Year of expiration
|
|
US net
|
|
|
|
operating loss
|
|
|
|
carry
|
|
|
|
forwards
|
|
2024
|
$
|
4,438
|
|
During
the years ended June 30, 2011 and 2010, Net1 generated additional foreign tax
credits related to the cash dividends received. Net1 has unused net foreign tax
credits of $8.2 million as of June 30, 2011 (June 30, 2010: 9.2 million), which
its management believes will be utilized in future periods. The unused foreign
tax credits generated expire after ten years in 2021, 2020 and 2019.
South
Africa and Austria
Net
operating losses incurred in South Africa generally expire if a company does not
trade during the year. In South Africa, the subsidiary companies that incurred
the losses are currently trading and will continue to trade for the foreseeable
future. Net operating losses incurred in Austria generally do not expire.
Uncertain
tax positions
As
of June 30, 2011 and 2010, respectively the Company has unrecognized tax
benefits of $2.7 million and $1.5 million, all of which would impact the
Companys effective tax rate. The Company files income tax returns mainly in
South Africa, Korea, Austria, the Russian Federation and in the US federal
jurisdiction. As of June 30, 2011, the Companys South African subsidiaries are
no longer subject to income tax examination by the South African Revenue Service
for periods before June 30, 2007. The Company is subject to income tax in other
jurisdictions outside South Africa, none of which are individually material to
its financial position, statement of cash flows, or results of operations. The
Company does not expect the change related to unrecognized tax benefits will
have a significant impact on its results of operations or financial position in
the next 12 months.
F-45
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
16.
INCOME
TAXES (continued)
Uncertain
tax positions (continued)
The
Company increased its unrecognized tax benefits by $1.2 million during the year
ended June 30, 2011. The following is a reconciliation of the total amounts of
unrecognized tax benefits for the year ended June 30, 2011 and 2010:
|
|
2011
|
|
|
2010
|
|
Unrecognized tax benefits - opening balance
|
$
|
1,459
|
|
$
|
1,060
|
|
Gross increases - tax positions in current period
|
|
1,233
|
|
|
368
|
|
Lapse of statute limitations
|
|
-
|
|
|
-
|
|
Foreign currency adjustment
|
|
(28
|
)
|
|
32
|
|
Unrecognized tax benefits - closing balance
|
$
|
2,664
|
|
$
|
1,460
|
|
As
of June 30, 2011 and 2010, the Company had accrued interest related to uncertain
tax positions of approximately $0.2 million and $0.1 million, respectively, on
its balance sheet.
17.
EARNINGS
PER SHARE
The
entire consolidated net income of the Company was attributable to the
shareholders of the Company comprising both the holders of Net1 common stock and
the holders of linked units prior to the Companys listing on the JSE in October
2008. As discussed in note 13, all of the remaining linked unit holders
converted their linked units to common stock as a result of listing of all of
the Companys common stock on the JSE and the linked units had the same rights
and entitlements as those attached to common stock. As a result of the
conversion of all the linked units, the entire consolidated net income of the
Company is attributable to the holders of Net1 common stock.
Basic
earnings per share include restricted stock awards that meet the definition of a
participating security. Restricted stock awards are eligible to receive
non-forfeitable dividend equivalents at the same rate as common stock. Basic
earnings per share have been calculated using the two-class method and basic
earnings per share for the years ended June 30, 2011, 2010 and 2009, reflects
only undistributed earnings.
Diluted
earnings per share has been calculated to give effect to the number of
additional common stock that would have been outstanding if the potential
dilutive instruments had been issued in each period. The calculation of diluted
earnings per share includes the dilutive effect of a portion of the restricted
stock awards granted to employees in August 2007, October 2010 and November 2010
as these restricted stock awards are considered contingently issuable shares for
the purposes of the diluted earnings per share calculation and the vesting
conditions in respect of a portion of the awards had been satisfied. The vesting
conditions are discussed in note 15 Stock-based compensation.
The
following tables detail the weighted average number of outstanding shares used
for the calculation of earnings per share as of June 30, 2011, 2010 and 2009:
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
Weighted average number of
outstanding shares of common stock basic
|
|
45,175
|
|
|
46,245
|
|
|
56,552
|
|
Weighted average effect of dilutive
securities: employee stock options
|
|
56
|
|
|
190
|
|
|
187
|
|
Weighted average number of
outstanding shares of common stock diluted
|
|
45,231
|
|
|
46,435
|
|
|
56,739
|
|
F-46
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
18.
SUPPLEMENTAL
CASH FLOW INFORMATION
Supplemental
cash flow information:
The
following table presents the supplemental cash flow disclosures for the years
ended June 30, 2011, 2010 and 2009:
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Cash received from interest
|
$
|
8,764
|
|
$
|
10,294
|
|
$
|
20,375
|
|
|
Cash paid for interest
|
$
|
5,660
|
|
$
|
747
|
|
$
|
7,982
|
|
|
Cash paid for income taxes
|
$
|
48,630
|
|
$
|
54,143
|
|
$
|
52,520
|
|
Financing
activities
Treasury
shares, at cost included in the Companys consolidated balance sheet as of June
30, 2009, includes 93,372 shares of the Companys common stock acquired for
approximately $1.3 million which were paid for on July 1, 2009. The liability
for this payment was included in accounts payable on the Companys consolidated
balance sheet as of June 30, 2009.
19.
OPERATING SEGMENTS
The
Company discloses segment information as reflected in the management information
systems reports that its chief operating decision maker uses in making decisions
and to report certain entity-wide disclosures about products and services, major
customers, and the countries in which the entity holds material assets or
reports material revenues.
The
Company allocated its international transaction-based activities to a new
operating segment, namely international transaction-based activities. This
operating segment comprises the transaction processing activities of KSNET, Net1
Virtual Card, and NUETS transaction processing activities in Iraq. Segment
results for the years ended June 30, 2010 and 2009, have not been restated due
to the insignificance of the transaction processing activities of Net1 Virtual
Card, and NUETS transaction processing activities in Iraq. However, for
comparative purposes in future periods, the Companys reported results for the
year ended June 30, 2011, include all legacy international
transaction-processing activities from July 1, 2010 and include KSNET from
November 1, 2010.
The
Company currently has five reportable segments: South African transaction-based
activities, international transaction-based activities, smart card accounts,
financial services and hardware, software and related technology sales. Each
segment, other than international transaction-based activities and the hardware,
software and related technology sales segment, operates mainly within South
Africa. The Companys reportable segments offer different products and services
and require different resources and marketing strategies and share the Companys
assets.
The
South African transaction-based activities segment currently consists mainly of
a state pension and welfare benefit distribution service provided to the South
African government and transaction processing for retailers, utilities,
medical-related claim service customers and banks. Fee income is earned based on
the number of beneficiaries included in the government pay-file as well as from
merchants and card holders using the Companys merchant retail application. In
addition, utility providers and banks are charged a fee for transaction
processing services performed on their behalf at retailers. This segment has
individually significant customers that each provides more than 10% of the total
revenue of the Company. For the year ended June 30, 2011, there was one such
customer, providing 47% of total revenue (2010: one such customers, providing
66% of total revenue; 2009: two such customers, providing 31% and 15% of total
revenue).
The
international transaction-based activities segment currently consists mainly of
KSNET which generates revenue from the provision of payment processing services
to merchants and card issuers through its VAN. This segment generates fee
revenue from the provision of payment processing services and to a lesser extent
from the sale of goods, primarily point of sale terminals, to customers in
Korea. The segment also generates transaction fee revenue from transaction
processing of UEPS-enabled smartcards through NUETS initiative in Iraq.
The
smart card accounts segment derives revenue from the provision of smart card
accounts, as a fixed monthly fee per card is charged for the maintenance of
these accounts. The financial services segment provides short-term loans as a
principal and life insurance products on an agency basis and generates
initiation and services fees.
F-47
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
19.
OPERATING
SEGMENTS (continued)
The
Company sold its traditional microlending business included in this segment on
March 1, 2009. In addition, the Company recorded a goodwill impairment of $1.8
million which was allocated to the financial services segment during the year
ended June 30, 2009. From March 1, 2009, the financial services segment
comprised only the Companys UEPS-based microlending business.
The
hardware, software and related technology sales segment markets, sells and
implements the UEPS as well as develops and provides Prism secure transaction
technology, solutions and services. The segment also includes the operations of
Net1 UTA, which comprise mainly hardware sales and licenses of the DUET system.
The segment undertakes smart card system implementation projects, delivering
hardware, software and business solutions in the form of customized systems.
Sales of hardware, SIM cards, cryptography services, SIM card licenses and other
software licenses are recorded within this segment. This segment also generates
rental income from hardware provided to merchants enrolled in the Companys
merchant retail application. The impairment losses incurred during the years
ended June 30, 2011 and 2010, of approximately $41.8 million and $37.4 million,
respectively, discussed in note 9 are included in the results of this operating
segment.
Corporate/eliminations
includes the Companys head office cost centers in addition to the elimination
of inter-segment transactions.
The
Company evaluates segment performance based on operating income. The following
tables summarize segment information which is prepared in accordance with GAAP:
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues to external customers
|
|
|
|
|
|
|
|
|
|
|
South African
transaction-based activities
|
$
|
188,590
|
|
$
|
191,362
|
|
$
|
148,399
|
|
|
International transaction-based
activities
|
|
69,947
|
|
|
-
|
|
|
-
|
|
|
Smart card accounts
|
|
33,315
|
|
|
31,971
|
|
|
29,576
|
|
|
Financial services
|
|
7,313
|
|
|
4,023
|
|
|
5,430
|
|
|
Hardware, software and
related technology sales
|
|
44,255
|
|
|
53,008
|
|
|
63,417
|
|
|
Total
|
|
343,420
|
|
|
280,364
|
|
|
246,822
|
|
|
Inter-company Revenues
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based
activities
|
|
4,015
|
|
|
3,837
|
|
|
3,499
|
|
|
International
transaction-based activities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Hardware, software and related
technology sales
|
|
2,281
|
|
|
1,892
|
|
|
2,557
|
|
|
Total
|
|
6,296
|
|
|
5,729
|
|
|
6,056
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
South African
transaction-based activities
|
|
74,642
|
|
|
106,036
|
|
|
83,509
|
|
|
International transaction-based
activities
|
|
1,707
|
|
|
|
|
|
|
|
|
Smart card accounts
|
|
15,140
|
|
|
14,532
|
|
|
13,442
|
|
|
Financial services
|
|
5,658
|
|
|
2,881
|
|
|
(34
|
)
|
|
Hardware, software and
related technology sales
|
|
(49,930
|
)
|
|
(42,524
|
)
|
|
5,498
|
|
|
Corporate/ Eliminations
|
|
(9,789
|
)
|
|
(11,114
|
)
|
|
(8,980
|
)
|
|
Total
|
$
|
37,428
|
|
$
|
69,811
|
|
$
|
93,435
|
|
F-48
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
19.
OPERATING SEGMENTS (continued)
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earned
|
|
|
|
|
|
|
|
|
|
|
South African
transaction-based activities
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
International transaction-based activities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Hardware, software and related
technology sales
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Corporate/ Eliminations
|
|
7,654
|
|
|
10,116
|
|
|
20,290
|
|
|
Total
|
|
7,654
|
|
|
10,116
|
|
|
20,290
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
South African
transaction-based activities
|
|
652
|
|
|
981
|
|
|
7,368
|
|
|
International transaction-based activities
|
|
526
|
|
|
-
|
|
|
-
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
15
|
|
|
1
|
|
|
-
|
|
|
Hardware, software and related
technology sales
|
|
59
|
|
|
5
|
|
|
197
|
|
|
Corporate/ Eliminations
|
|
7,420
|
|
|
60
|
|
|
1,897
|
|
|
Total
|
|
8,672
|
|
|
1,047
|
|
|
9,462
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
South African
transaction-based activities
|
|
8,994
|
|
|
6,714
|
|
|
4,461
|
|
|
International transaction-based activities
|
|
16,584
|
|
|
-
|
|
|
-
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
539
|
|
|
510
|
|
|
434
|
|
|
Hardware, software and related
technology sales
|
|
7,846
|
|
|
10,978
|
|
|
11,020
|
|
|
Corporate/ Eliminations
|
|
708
|
|
|
1,146
|
|
|
1,167
|
|
|
Total
|
|
34,671
|
|
|
19,348
|
|
|
17,082
|
|
|
Income taxation expense
|
|
|
|
|
|
|
|
|
|
|
South African
transaction-based activities
|
$
|
21,379
|
|
$
|
29,713
|
|
$
|
21,966
|
|
|
International transaction-based activities
|
|
(1,124
|
)
|
|
-
|
|
|
-
|
|
|
Smart card accounts
|
|
4,238
|
|
|
4,068
|
|
|
3,764
|
|
|
Financial services
|
|
1,579
|
|
|
806
|
|
|
702
|
|
|
Hardware, software and related
technology sales
|
|
(3,551
|
)
|
|
684
|
|
|
1,547
|
|
|
Corporate/ Eliminations
|
|
11,004
|
|
|
5,551
|
|
|
14,765
|
|
|
Total
|
|
33,525
|
|
|
40,822
|
|
|
42,744
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
South African
transaction-based activities
|
|
52,613
|
|
|
75,536
|
|
|
54,179
|
|
|
International transaction-based activities
|
|
2,700
|
|
|
-
|
|
|
-
|
|
|
Smart card accounts
|
|
10,904
|
|
|
10,465
|
|
|
9,678
|
|
|
Financial services
|
|
4,061
|
|
|
2,073
|
|
|
(711
|
)
|
|
Hardware, software and related
technology sales
|
|
(46,316
|
)
|
|
(43,405
|
)
|
|
3,905
|
|
|
Corporate/ Eliminations
|
|
(21,315
|
)
|
|
(5,679
|
)
|
|
19,550
|
|
|
Total
|
|
2,647
|
|
$
|
38,990
|
|
$
|
86,601
|
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
|
|
|
|
South African
transaction-based activities
|
|
2,423
|
|
$
|
2,177
|
|
$
|
3,161
|
|
|
International transaction-based activities
|
|
12,113
|
|
|
-
|
|
|
-
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
400
|
|
|
302
|
|
|
751
|
|
|
Hardware, software and related
technology sales
|
|
117
|
|
|
251
|
|
|
858
|
|
|
Corporate/ Eliminations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
|
$
|
15,053
|
|
$
|
2,730
|
|
$
|
4,770
|
|
F-49
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
19.
OPERATING
SEGMENTS (continued)
The
segment information as reviewed by the chief operating decision maker does not
include a measure of segment assets per segment as all of the significant assets
are used in the operations of all, rather than any one, of the segments. The
Company does not have dedicated assets assigned to a particular operating segment.
Accordingly, it is not meaningful to attempt an arbitrary allocation and segment
asset allocation is therefore not presented.
It
is impractical to disclose revenues from external customers for each product and
service or each group of similar products and services.
Geographic
Information
Revenues
based on the geographic location from which the sale originated for the years
ended June 30, are presented in the table below:
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
South Africa
|
$
|
264,485
|
|
$
|
267,478
|
|
$
|
220,408
|
|
Korea
|
|
68,392
|
|
|
-
|
|
|
-
|
|
Europe
|
|
10,465
|
|
|
12,301
|
|
|
19,560
|
|
Rest of world
|
|
78
|
|
|
585
|
|
|
6,854
|
|
Total
|
$
|
343,420
|
|
$
|
280,364
|
|
$
|
246,822
|
|
20.
COMMITMENTS
AND CONTINGENCIES
Operating
lease commitments
The
Company leases certain premises. At June 30, 2011, the future minimum payments
under operating leases consist of:
Due within 1 year
|
$
|
3,392
|
|
Due within 2 years
|
|
1,497
|
|
Due within 3 years
|
|
1,090
|
|
Due within 4 years
|
|
-
|
|
Due within 5 years
|
$
|
-
|
|
Operating
lease payments related to the premises and equipment were $7.0 million, $5.2
million and $4.1 million, respectively, for the years ended June 2011, 2010 and
2009, respectively.
Capital
commitments
As
of June 30, 2011 and 2010, the Company had outstanding capital commitments of
approximately $0.4 million and $0.02 million, respectively.
Purchase
obligations
As
of June 30, 2011 and 2010, the Company had purchase obligations totaling $1.9
million and $3.1 million, respectively.
Contingencies
The
Company is subject to a variety of insignificant claims and suits that arise
from time to time in the ordinary course of business.
Management
currently believes that the resolution of these matters, individually or in the
aggregate, will not have a material adverse impact on the Companys financial
position, results of operations and cash flows.
F-50
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2011, 2010 and 2009
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
21.
RELATED
PARTY TRANSACTIONS
During
the year end June 30, 2010, the Company engaged the services of PBel (Pty) Ltd
(PBEL) to perform software development services, primarily software utilized
on mobile phones and by cash-accepting kiosks. All software developed is the
Companys property. PBEL is jointly owned by Dr. Belamant and his son. The PBEL
transaction was approved by the Companys Audit Committee and thus Dr. Belamant
did not participate in the Boards decision to engage PBEL. During the year
ended June 30, 2011 and 2010, the Company paid PBEL approximately $0.9 million
and $0.2 million, respectively, for software development services.
22.
FOREIGN
EXCHANGE GAIN RELATED TO SHORT-TERM INVESTMENT
The
Company entered into an asset swap arrangement (in the form of a $110 million
32-day call account instrument) in order to facilitate a short-term loan
facility, however this asset swap arrangement was not linked to the loan
facility and did not require redemption on the same date as the repayment of the
loan facility. The Company earned interest at a rate of one month US dollar
London Interbank Offered Rate (LIBOR) plus 0.25% on this instrument. The
Company gave a call notice to the obligor on September 10, 2008, and the capital
of $110 million (or ZAR 1,100.7 million) and interest on this instrument was
repaid on October 16, 2008. The Company has realized a foreign exchange gain of
approximately $26.7 million for the year ended June 30, 2009. No hedge
accounting was applied.
23.
UNAUDITED
QUARTERLY RESULTS
The
following tables contain selected unaudited consolidated statements of (loss)
income for each quarter of fiscal 2011 and 2010:
|
|
Three
months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sep 30,
|
|
|
Total
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
YTD
|
|
|
|
(In thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
97,368
|
|
$
|
92,758
|
|
$
|
89,011
|
|
$
|
64,283
|
|
$
|
343,420
|
|
Operating income (loss)
|
|
26,593
|
|
|
(22,125
|
)
|
|
21,974
|
|
|
10,986
|
|
|
37,428
|
|
Net income (loss) attributable to Net1
|
$
|
6,832
|
|
$
|
(21,562
|
)
|
$
|
9,948
|
|
$
|
7,429
|
|
$
|
2,647
|
|
Earnings (Loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share, in $
|
|
0.15
|
|
|
(0.47
|
)
|
|
0.22
|
|
|
0.16
|
|
|
0.06
|
|
Diluted earnings (loss) per share, in $
|
|
0.15
|
|
|
(0.47
|
)
|
|
0.22
|
|
|
0.16
|
|
|
0.06
|
|
|
|
Three
months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sep 30,
|
|
|
Total
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
YTD
|
|
|
|
(In thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
68,695
|
|
$
|
72,291
|
|
$
|
73,864
|
|
$
|
65,514
|
|
$
|
280,364
|
|
Operating (loss) income
|
|
(12,835
|
)
|
|
26,859
|
|
|
29,419
|
|
|
26,368
|
|
|
69,811
|
|
Net (loss) income attributable to Net1
|
$
|
(17,007
|
)
|
$
|
18,772
|
|
$
|
19,284
|
|
$
|
17,941
|
|
$
|
38,990
|
|
(Loss) Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share, in $
|
|
(0.37
|
)
|
|
0.41
|
|
|
0.43
|
|
|
0.37
|
|
|
0.84
|
|
Diluted (loss)
earnings per share, in $
|
|
(0.37
|
)
|
|
0.41
|
|
|
0.42
|
|
|
0.37
|
|
|
0.84
|
|
24.
SUBSEQUENT
EVENTS
In
August 2011, the Company received a further extension of its contract with SASSA
on the same terms and conditions as its existing agreement. The contract now
expires on March 31, 2012.
*********************
F-51
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